MARC has affirmed its ratings on Berjaya Land Berhad’s (BLand) RM500.0 million Medium-Term Notes (MTN) Programme guaranteed by Danajamin Nasional Berhad (Danajamin) at AAA_(fg) and the RM150.0 million MTN Programme guaranteed by OCBC Bank (Malaysia) Berhad (OCBC Malaysia) at AAA_(bg). The outlook for the ratings is stable. The affirmed ratings reflect the unconditional and irrevocable guarantees provided by Danajamin and OCBC Malaysia respectively. Danajamin carries a financial insurer rating of AAA/stable while OCBC Malaysia carries a public information rating of AAA/stable from MARC.

BLand is an intermediate investment holding company of Berjaya group with interests in gaming, motors, properties, hotels and recreation. At the holding company level, Bland’s revenue consists mainly of dividend income from its gaming subsidiary Berjaya Sports Toto Berhad, accounting for 70% of its total dividend income of RM178.0 million in the financial year ended April 30, 2015 (FY2015). Nonetheless, BLand’s financial profile remains modest, hampered by high finance costs in line with increased borrowings which stood at RM4.2 billion as at end-FY2015 (FY2014: RM3.7 billion). As its internally generated funds remained low relative to its debt servicing obligations, BLand continues to rely on external funding and proceeds from asset disposals. In this regard, MARC notes that the proceeds from the proposed sale of the Great Mall project in Heibei Province, China for about RM1.4 billion are expected to be utilised to pare down group borrowings and address working capital requirements.

BLand has reduced its domestic property development activities in line with weak property market sentiments and is focused on its existing Bukit Jalil development. For its ongoing domestic developments, the group has a gross development value (GDV) of about RM900.0 million which will support the property division’s performance over the near term. MARC observes, however, that BLand’s foreign property developments considerably outweigh its domestic projects in terms of GDV, size and gestation periods. Its foreign ongoing projects have a combined total GDV of about RM24.7 billion and are located mostly in Northeast Asia – Korea (37.2%), Vietnam (29.6%) and China (23.5%) - with the development period stretching up to 2025. MARC continues to view BLand’s foreign property projects as exposed to cross-border risks. This has become evident in the recent suspension of its Jeju Island development by the South Korean government. As of date, phase 1 of this project with an estimated gross development cost of about RM500.0 million, is 60% completed. BLand partly mitigates cross-border risk by entering into joint ventures with local parties.

Contribution from BLand’s clubs and recreation, and hotels and resorts divisions is weak, collectively accounting for 6.1% and negative 3.9% of the group’s revenue and operating profit in FY2015 respectively. The hotels and resorts managed by BLand achieved occupancy rates of about 59% in FY2015; the group is in the midst of developing a hotel and residence project in Kyoto, Japan. Upon its completion in mid-2016, the hotel is expected to be managed by Four Seasons Hotels Limited.

For FY2015, BLand’s consolidated pre-tax profit declined sharply to RM25.3 million, mainly due to non-cash impairment of goodwill related to the gaming cash generating units as well as other investments and assets. Excluding the impairment of goodwill, BLand’s consolidated pre-tax profit would have been RM406.0 million. Cash flow from operations (CFO) stood at RM229.4 million (FY2014: RM180.1 million), while the group’s debt-to-equity (DE) ratio increased to 0.52 times as at end-FY2015, on higher borrowings following the full drawdown on the rated MTN. In tandem with the increase in borrowings, interest coverage ratios have remained low: at the consolidated level, CFO interest cover stood at 1.19 times at end-FY2015 (FY2014: 0.85 times) while at the holding company level, CFO interest cover was weak at about 0.74 times. The first MTN repayment of RM275.0 million is scheduled in December 2017; which could be rolled over under the programme.

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:
Saifuruddin Othman, +603-2082 2245/ saifuruddin@marc.com.my;
Taufiq Kamal, +603-2082 2251/ taufiq@marc.com.my.