MARC has assigned ratings of MARC-1/AA- to Sunway Berhad’s RM2.0 billion Commercial Papers/Medium-Term Notes (CP/MTN) programme. Concurrently, the rating agency has affirmed its existing ratings on Sunway and related company Sunway Treasury Sukuk Sdn Bhd’s issuances. The ratings outlook is stable. 

The new CP/MTN programme will replace Sunway’s existing RM2.0 billion CP/MTN programme expiring in November 2020; the outstanding CPs and MTNs of RM866 million will mature by mid-May 2020. 

The assigned ratings incorporate Sunway’s well-established market position in the property development, property investment and construction sectors. Sunway management’s longstanding experience in these sectors is expected to place the group in good stead to withstand the impact from the COVID-19 outbreak. The stable outlook is mainly premised on MARC’s expectation that any weakness in the group’s performance stemming from the sudden impact of the crisis on its businesses will be tempered by Sunway’s flexibility to undertake measures to alleviate pressures on its credit metrics. 

Among the factors in assigning the ratings, MARC has considered the group’s projected borrowings trajectory over the near term, despite the sizeable limits afforded under the group’s various programmes for further drawdowns. At end-December 2019, Sunway’s borrowings stood at RM9.6 billion, up from RM8.9 billion in the previous year. The rating agency expects Sunway to adhere to prudent borrowing levels and notes that while the gross gearing level is high with a debt-to-equity (DE) ratio of over 1.06x, its net DE remains moderate at 0.44x as of end-2019. 

Group pre-tax earnings grew 4.8% y-o-y to RM876.6 million in 2019 (excluding one-off disposal gains). Cash flow from operations (CFO) stood at RM456.9 million. Including interest income and dividend income from Sunway REIT, the adjusted CFO interest coverage stood at 3.83x. Sunway’s healthcare sector is a key focus for growth, representing the bulk of Sunway’s capex programme over the medium term. The group is expected to invest RM1.6 billion in capex for three new hospitals to increase bed count to 1,706 from 876 at end-2019. Nonetheless, property development and investments will remain key drivers of group earnings in the foreseeable future. 

The pre-tax profit from property development rose by 42.2% y-o-y to RM246.3 million, largely attributable to higher progressive profit recognised from local development projects and partial profit recognition from the group’s project in China. The performance of the segment is supported by ongoing projects worth RM4.1 billion in gross development value and by unbilled sales of RM2.7 billion. Its property investment segment recorded pre-tax profit growth of 12.6% y-o-y to RM336.3 million, with occupancy of most investment properties held directly under Sunway and Sunway REIT remaining stable. 

However, MARC is concerned on the performance of the hotel and retail businesses going forward, though the extent of the impact will depend on the duration of the Movement Control Order and the recovery from the challenging economic conditions. The group has announced a break in rental payments to its mall tenants which would lead to an expected modest loss in revenue of about RM20 million. Similarly, while the group’s construction order book (of external projects) of RM3.6 billion provides earnings visibility for the medium term, the construction sector is also beset by near-term challenges. 

Contacts:
Lim Wooi Loon, +603-2717 2943/ wooiloon@marc.com.my;
Taufiq Kamal, +603-2717 2951/ taufiq@marc.com.my