MARC Ratings has assigned ratings to Sunway Group’s existing unrated sukuk and unrated debt as follows:

The outlook on both ratings is stable.

The two-notch rating differential between the perpetual sukuk and Sunway’s long-term senior unsecured rating of AA-/Stable is in line with MARC Ratings’ rating methodology on subordinated instruments. As the current outstanding of RM600.0 million under the Perpetual Sukuk Programme was fully subscribed by a single investor and majority shareholder of Sunway, the perpetual sukuk is classified as a financial liability under MFRS 132. In light of this, the group has proposed subsequent issuances to third-party investors that would allow for a 50% equity credit on the perpetual sukuk if it complies with the features highlighted in the aforementioned methodology. 

Issuances under the rated programmes in the near term will be used to fully refinance the outstanding perpetual sukuk. Group borrowings stood at RM9.8 billion as at end-1H2023 (2022: RM9.1 billion), translating to a gross debt-to-equity ratio of 0.7x. Borrowings are projected to hover around RM10.0 billion to RM11.0 billion over the medium term.

MARC Ratings has considered Sunway’s strong market position and its well-established operating track record across key business segments — property development, property investment, and construction — as key rating drivers. Ongoing property development projects with a combined gross development value of RM10.7 billion — domestic projects (RM4.5 billion), Singapore (RM6.1 billion), China (RM0.1 billion) — and unbilled sales of RM4.9 billion as at end-June 2023 provide earnings visibility over the medium term. The projects achieved an overall take-up rate of 66% as at end-June 2023. In Singapore, its two residential projects, just launched in 1H2023, have received encouraging response. Property investment recorded strong improvement due to higher rental income following the cessation of rebates given during the pandemic period. Its hospitality segment, which recorded higher room rates and occupancy levels, also contributed to the improvement. MARC Ratings expects this segment’s performance to benefit from a rebound in tourism following the recent move to liberalise visas for tourists from major countries.

Sunway’s construction segment has sustained its order book above about RM5.0 billion since 2018; order book stood at RM5.8 billion as at end-June 2023, of which major contracts are for a data centre in Johor (RM1.6 billion) and work packages under the Johor-Singapore Rapid Transit System Link (RM587 million). MARC Ratings notes the construction margin of between 11%-15% in recent years, which is higher than most of its peers and supported by internal contracts for property investment. Given the group’s strong track record in construction, its order book could improve from the expected increase in rollout of infrastructure projects in 2024.

Sunway has a growing domestic market presence in the healthcare sector, with 845 licensed beds at its two existing medical centres — Sunway Medical Centre Sunway City and Sunway Medical Centre Velocity. By 2H2024, Sunway is expected to have a total of five medical centres with potential capacity of about 2,300 beds. Its healthcare segment, which is undertaken on a joint venture basis by Sunway Healthcare Group, is forecast to incur capex of about RM1.3 billion for its expansion. This segment could grow sharply if the group were to undertake any mergers and acquisitions. Notwithstanding this strength, the healthcare segment could incur higher debt to fund its expansion plans.

For 1H2023, group revenue grew by 14% y-o-y to RM2.7 billion, while pre-tax profit rose marginally y-o-y to RM395.0 million due to higher operating and financing costs. Given borrowings are not expected to decline over the near-to-medium term, the rating agency expects the group to balance its funding requirement against its cash flow generation ability. Cash and bank balances of RM2.1 billion as at end-June 2023 provide some liquidity buffer.

Concurrently, MARC Ratings has affirmed the existing ratings on Sunway Group’s following programmes:

Cyndy Goh, +603-2717 2941/ cyndy@marc.com.my

Umar Abdul Aziz, +603-2717 2962/ umar@marc.com.my

Taufiq Kamal, +603-2717 2951/ taufiq@marc.com.my