MARC has affirmed its debt ratings on Putrajaya Holdings Sdn Bhd’s (PJH) outstanding issuances as follows:

• RM370.0 million Sukuk Musharakah Programme (due 2030) at AAA_IS/stable;
• RM3.0 billion Sukuk Musharakah Programme (due 2032) at AAA_IS/stable;
• RM1.5 billion Sukuk Musharakah Medium-Term Notes (MTN) Programme (due 2033) at AAA_IS/stable; and
• RM2.2 billion Murabahah Medium-Term Notes (MMTN) Programme (due 2021) at AAA_IS/stable.

The affirmed ratings incorporate PJH’s stable and sizeable annual rental income from the Malaysian government under long-term lease-and-sublease agreements, its status as the master developer of the federal government administrative capital in Putrajaya and its developmental track record. The ratings also benefit from MARC’s assessment on the credit strength of PJH’s government-linked major shareholders, namely KLCC Holdings Sdn Bhd and Khazanah Nasional Berhad.

As of date, PJH has delivered 37 government buildings with a total gross built-up area of 36.4 million sq ft. Its most recent completed projects were the Ministry of International Trade and Industry (MITI) building, Ministry of Transport and Road Transport Department building, and the Election Commission of Malaysia building. As with other completed government buildings, PJH has subleased these buildings to the government for 25 years under lease-and-sublease agreements with the Federal Land Commissioner. Ongoing developments include the construction of nine government buildings in Parcel F and the Malaysian Anti-Corruption Commission building in Precinct 7 in Putrajaya, which reached about 17.7% and 62.3% completion respectively as at end-November 2016.

MARC notes PJH’s sizeable sublease annual rental income of RM1.3 billion provides a strong debt servicing ability to meet its annual principal repayments of between RM480.0 million and RM810.0 million over the next five years. This notwithstanding, MARC highlights that, apart from the RM2.2 billion MMTN programme, the sublease rentals have not been specifically assigned to the other rated programmes, indicating that liquidity management is crucial to meet financial obligations on a timely basis.

PJH’s increasing private property development activities expose the company to market risk. Its private projects include residential and commercial developments in Putrajaya. In 1H2016, PJH launched only three residential developments with an estimated total gross development value (GDV) of about RM235.6 million as compared to four residential developments and a commercial development with a combined GDV of about RM685.9 million in 2015. The overall take-up rates have been modest at 66.9% in 1H2016. PJH also launched an affordable housing scheme, 1Malaysia Civil Servants Housing (PPA1M), in mid-2015, recording 96% sales as at end-June 2016. The group will launch another 2,266 units under the programme over the next two to three years. PJH has plans for developments on its recently acquired 1,678 acres in Sepang, Selangor and on total 9.2 acres in Jalan Ampang, Kuala Lumpur. MARC understands that PJH will undertake an integrated mixed development project in Jalan Ampang on a joint-venture basis; however, the plan is still in preliminary stages.

For 1H2016, PJH recorded higher revenue of RM1.25 billion which contributed to an improved pre-tax profit of RM507.0 million (1H2015: RM1.13 billion; RM449.0 million). The group generated lower cash flow from operations (CFO) of about RM391.6 million (1H2015: RM478.3 million), due partly to the 5%-10% rebate given to property buyers as well as absorption of legal fees and stamp duty to boost property sales. Coupled with a higher net debt repayment of RM165.0 million during the period, its cash and cash equivalents stood lower at about RM665.0 million (1H2015: RM811.8 million).

The group’s total borrowings stood at RM5.3 billion as at end-June 2016, with a debt-to-equity (DE) ratio of 0.74x (2015: 0.81x). Over the near term, borrowings could increase to fund land acquisitions and undertake new developments. MARC opines that PJH has considerable financial flexibility with unutilised credit lines of about RM1.53 billion. While PJH has been paying out higher dividends over the past two financial years amounting to a total of RM473.0 million, any sharp increase in dividend payouts going forward could weigh on its liquidity.

The stable ratings outlook reflects MARC’s expectations that PJH’s credit profile would remain commensurate with the ratings. Any significant weakening in credit metrics and/or shareholder support could apply pressure on the ratings.

Contacts:
Cheah Wan Kin, +603-2082 2232/ wankin@marc.com.my;
Taufiq Kamal, +603-2082 2251/ taufiq@marc.com.my.