MARC has assigned preliminary ratings to Berjaya Land Berhad’s (BLand) proposed 10-year RM650.0 million guaranteed Medium-Term Notes (MTN) programme of AAA(fg) for the RM500.0 million portion guaranteed by Danajamin Nasional Berhad (Danajamin) guaranteed and AAA(bg) for the RM150.0 million guaranteed by OCBC Bank (Malaysia) Berhad (OCBC Malaysia). The outlook for the ratings is stable.   

The assigned rating on the RM500.0 million portion reflects the unconditional and irrevocable financial guarantee provided by Danajamin which carries a financial insurer rating of AAA/stable from MARC. The rating on the RM150.0 million portion reflects the credit strength of an unconditional and irrevocable guarantee provided by OCBC Malaysia which carries a public information rating of AAA/stable from MARC.

BLand is an intermediate investment holding company within the Berjaya Group and has subsidiaries and associate companies that are mainly involved in gaming, property development and property investments, and hotel and leisure-related activities. As a non-operating holding company, BLand is dependent on residual cash flow from subsidiaries to meet its financial obligations which were mainly incurred to fund the operations of these subsidiaries. Correspondingly, the current portion of amount owed by subsidiaries to the holding company has remained high, standing at RM1.3 billion, or about 95.8% of BLand’s total current assets at financial year ended April 30, 2014 (FY2014). Proceeds from the issuance will be mainly utilised to refinance BLand’s sizeable borrowings of RM1.1 billion in FY2014 (FY2013: RM1.2 billion) and reimburse investments made in the hospitality and integrated development businesses.

BLand’s gaming subsidiary Berjaya Sports Toto Berhad (BToto) remains the key contributor to the group, accounting for 70.5% and 80.0% of consolidated revenue of RM5.0 billion and operating profit of RM701.9 million respectively in FY2014. The gaming company has an entrenched domestic market position, significant operating track record, and strong cash generating ability. Nonetheless, given BLand’s 40.8% stake in BToto, dividends from the gaming subsidiary have been relatively modest, amounting to RM78.2 million in FY2014. MARC notes that BToto’s accounts are consolidated on the basis that the combined stake of BLand and two other related shareholders exceed the 50% threshold in BToto. BToto continues to expand its operations; it recently acquired UK-based luxury car dealer H.R. Owen plc for £26.9 million (about RM131.5 million) from internally generated funds. BToto’s borrowings stood at RM724.0 million as at end-July 2014.

BLand’s domestic property development activities have been relatively modest despite the availability of a large land bank. The land bank is expected to increase pending the completion of the acquisition of 245 acres of Selangor Turf Club (STC) land in Sungai Besi, Kuala Lumpur, by a subsidiary of BLand, for a total consideration of RM640.0 million to be settled by cash and land swap. BLand is expected to carry out a mixed-development project with a gross development value (GDV) of about RM24.0 billion on this land. MARC notes that BLand’s recent launches, particularly in Bukit Jalil in the Klang Valley, have achieved strong take-up rates in spite of the challenging conditions in the domestic property market. For its ongoing domestic residential and commercial developments, the group has a GDV of RM2.3 billion which will support the property division’s performance in the near term.

MARC observes, however, that BLand’s foreign property development activities considerably outweigh domestic projects, both in terms of size and gestation periods. Located mostly in Asia - Vietnam, South Korea, China, Japan and Thailand - the total GDV of foreign ongoing projects is RM62.0 billion, with development periods up to 2035. While most of the projects have been able to obtain external funding, secured by a range of assets, some have depended on holding company for part of the funding requirements. As a whole, these projects remain susceptible to cross-border risk in addition to market risk in the relevant countries, although BLand mitigates the risks by entering into joint ventures with local parties.

The prospects for BLand’s clubs and recreation business remain weak while the performance of the hotels and resorts division is considered moderate and characterised by asset disposals and acquisitions. The group disposed Berjaya Singapore Hotel, registering a gain on disposal of RM94.7 million in FY2014. The group is in the midst of developing a hotel and residences project in Kyoto, Japan, which is expected to be managed by Four Seasons Hotels Limited upon completion in mid-2016.

Excluding the one-off gain from the hotel disposal in FY2014, the group’s consolidated pre-tax profit would have declined marginally by 4.6% to RM440.5 million, mainly due to lower earnings contribution from its gaming division. For FY2014, the group’s CFO was lower at RM142.9 million (FY2013: RM322.4 million), while the group’s debt-to-equity (DE) ratio remained moderate at 0.41x as at end-July 2014. At the holding company level, the quantum of dividends received over the past five years has fluctuated, declining by 18.4% to RM86.7 million in FY2014 (FY2013: RM106.3 million). Given the size of the holding company’s borrowings and debt servicing obligations, a near-term improvement in the group’s credit metrics would remain challenging. The holding company’s borrowings are expected to increase to about RM1.3 billion upon the full drawdown of the proposed RM650.0 million MTN programme, potentially increasing the company’s leverage to 0.41x (FY2014: 0.37x). MARC views that the company will continue to be largely dependent on refinancing, disposal of investments and/or repayment of advances by subsidiaries to meet its debt obligations.

Notwithstanding BLand’s standalone risk factors, noteholders are insulated from the downside risk related to the credit profile of BLand by the guarantees provided by Danajamin and OCBC Malaysia. Any change in the supported ratings or rating outlook would be primarily driven by changes in the credit strength of the guarantors.

Contacts:
Jasmine Kua, +603-2082 2280/ jasmine@marc.com.my;
Taufiq Kamal, +603-2082 2251/ taufiq@marc.com.my.