MARC has affirmed its ratings of MARC-1IS/AA-IS on UEM Sunrise Berhad’s (UEM Sunrise) two Islamic Commercial Paper and Islamic Medium-Term Notes programmes (ICP/IMTN-1 and ICP/IMTN-2). The ICP/IMTN-1 and ICP/IMTN-2 each has a nominal value of RM2.0 billion with a sublimit of RM500.0 million on the ICP programmes. The outlook on the ratings is stable.

Majority-owned by UEM Group Berhad (UEM Group), UEM Sunrise has a longstanding track record in property development with sizeable land bank in Iskandar Johor, the Klang Valley and Tapah, Perak. The long-term rating on UEM Sunrise incorporates a one-notch rating uplift for parental support from UEM Group, a government-related entity with diversified businesses and strong financial profile. The support assessment considers UEM Sunrise as a strategic subsidiary based on its position as the property arm of its parent.

In 2016, UEM Sunrise launched three projects domestically — two in Iskandar Puteri and one in an existing township development in Bangi — with a total gross development value (GDV) of RM558.4 million. The response for these projects has been encouraging with RM283.5 million in sales recorded as at end of February 2017. UEM Sunrise has shifted its domestic focus to the mid-range landed and affordable housing segments to offset the weaker demand for its high-end units in the residential sector; the group has also strengthened its marketing efforts to reduce its property inventories during the year. The efforts have resulted in an increase in the take-up rate for Almas, a mixed development launched in 2013 in Iskandar Puteri with a launch GDV of RM558.0 million, to 89% from 38% a year earlier.

The remaining GDV of the group’s ongoing projects stood at RM28.3 billion, of which about 76% is in Iskandar Puteri. Given the geographical concentration of its projects and land bank, the group may face challenges amid weakening demand and competing developments in the area. Despite the weakening prospects of the domestic property market, UEM Sunrise’s contracted sales from domestic projects stood at RM1.4 billion at end-2016, which provides earnings visibility over the medium term. The earnings visibility is further supported by unrecognised revenue for its Australian projects of RM2.7 billion as at end-December 2016.

UEM Sunrise has registered a 99% take-up rate for its maiden Australian project Aurora Melbourne Central (Aurora), a RM2.4 billion high-rise residential development in Melbourne that was launched in 2014; and an 89% take-up rate for The Conservatory, a high-end residential project in the city with a GDV of RM961 million launched in 2015. Developed under the build-and-sell concept, Aurora is expected to be completed in stages starting from end-2018, while The Conservatory is expected to be fully completed by end-2018. Nonetheless, the large-scale nature of its build-and-sell foreign projects and its sizeable domestic projects have weighed on UEM Sunrise’s cash flow generation. At end-2016, UEM Sunrise recorded negative cash flow from operations (CFO) of RM724 million. MARC expects cash flows to improve over the medium term as its build-and-sell projects are completed. In the near term, cash flows are expected to be supported by sales of the group’s overseas and local land parcels of about RM549 million. In March 2017, the group disposed 4.9 acres in Richmond, British Columbia, Canada, for CAD113 million (RM372 million). The group’s other land sales in 2017 include several parcels of lands in Iskandar, Johor, for a combined value of about RM177 million.

In 2016, group revenue increased slightly by 5.2% y-o-y to RM1,841.5 million; however, pre-tax profit declined by 37% y-o-y to RM217.6 million. The decline in profitability was partly due to higher provision for liquidated ascertained damages and partly due to weaker performance of its joint venture projects. Group debt servicing ability remains moderate with EBITDA finance coverage of 3.2 times in 2016 (2015: 4.4 times), with the decline attributable to the increase in borrowings. As at end-2016, group borrowings rose to RM3.7 billion (end-2015: RM2.8 billion) with the increase utilised largely for the acquisition of the site for its St. Kilda development in Australia and the remaining 38% equity stake in its Solaris 3 development. As a result of the increase, its debt-to-equity (DE) rose to 0.52 times while net DE rose to 0.41 times (2015: 0.38 times; 0.25 times). The group liquidity position remains strong with cash balances of RM788.5 million.

The stable rating outlook incorporates MARC’s expectations that UEM Sunrise’s standalone credit profile would remain commensurate with its current rating band. The standalone rating could face downward pressure if the group’s debt coverage metrics weaken on the back of depressed earnings or higher-than-expected increase in borrowings. The rating and outlook could also be revised if parental support from UEM Group is assessed as weakening and/or if any material change affects the status or credit profile of the parent.

Contacts:
Hari Vijay, +603-2082 2280/ harivijay@marc.com.my;
Saifuruddin Othman, +603-2082 2245/ saifuruddin@marc.com.my;
Taufiq Kamal, +603-2082 2251/ taufiq@marc.com.my