Malaysian Rating Corporation Berhad

12/12/2019 | Press release | Distributed by Public on 12/12/2019 02:59

MARC affirms ratings on Sunway’s CP/ MTN and Sunway Treasury’s Sukuk and ICP/ IMTN programmes at MARC-1/AA- and MARC-1IS(cg)/AA-IS(cg)

MARC has affirmed its ratings on Sunway Berhad's issuances under the RM2.0 billion Commercial Papers/Medium-Term Notes (CP/MTN) programmes at MARC-1/AA-. Concurrently, the ratings on Sunway Treasury Sukuk Sdn Bhd's issuances under the RM2.0 billion Sukuk Programme and RM10.0 billion Islamic Commercial Paper/ Islamic Medium-Term Notes (ICP/ IMTN) programmes have been affirmed at MARC-1IS(cg)/AA-IS(cg). The ratings outlook is stable.

The ratings on Sunway Treasury's issuances are equalised to Sunway's senior debt issuances on the basis of a corporate guarantee the latter has provided to its wholly-owned subsidiary's issuances.

The affirmed ratings incorporate Sunway's well-established market position in the property development, property investment and construction sectors, and stable and sizeable recurring income from its investment properties and real estate investment trust (REIT). The ratings are mainly constrained by the group's high borrowing levels and the challenging outlook for the group's mainstay businesses of property development and construction.

In affirming the ratings, the rating agency has only considered the group's current and potentially slight increase in the group's borrowing levels in the near term, despite the sizeable headroom provided under the group's various rated and unrated programmes for further drawdowns. At end-September 2019, Sunway's borrowings stood at RM9.3 billion, translating to an adjusted debt-to-equity (DE) ratio of 1.03x (on accounting for equity credit for its perpetual sukuk) (2018: RM8.9 billion; 1.03x). On a net basis, DE ratio remained moderate at 0.40x given the group's sizeable cash balance. The high cash position to some extent reflects the group's funding strategy of utilising drawdowns under the programmes for treasury operations and investments. MARC notes that the group's funding strategy could result in funding mismatch, exposing the group to short-term liquidity risk.

In 9M2019, Sunway registered a 13.4% y-o-y decline in revenue to RM3.4 billion. This was attributable to lower contributions mainly from property development and construction. Its pre-tax profit increased by 3.9% y-o-y to RM616.1 million (excluding the disposal gain of RM37.7 million on Sunway University assets to Sunway REIT) mainly due to the healthcare segment. This segment recorded a sharp 29.1% y-o-y revenue growth to RM422.0 million and 34.5% y-o-y increase in pre-tax profit to RM50.5 million in line with the increase in hospital beds and occupancy.

Over the next three years, the group will build three more hospitals that would increase its bed count to 1,706 from the current 876. This is expected to incur capex spending of up to RM1.6 billion, representing the bulk of Sunway's capex programme over the medium term. Sunway's construction order book of external projects stood at about RM3.9 billion as at end-August 2019, providing earnings visibility through mid-2022. Its order book replenishment remained healthy as the lower number of infrastructure contracts was offset by new building construction jobs. However, due to its large contracts being in the early stages of development, progress billings were lower which led to 29.7% y-o-y revenue decline in the construction division in 9M2019.

Sunway's property development segment recorded an average effective take-up rate of 63.4% on its ongoing projects with effective gross development value (GDV) of RM3.7 billion. The moderate take-up rate has led to higher unsold GDV of RM1.4 billion. For 9M2019, the property development segment's revenue declined by 21.2% y-o-y to RM327.7 million. However, its pre-tax profit increased by 5.7% y-o-y to RM129.1 million attributable to higher progressive profit recognised. Its contracted (unbilled) sales of RM2.7 billion provides earnings visibility through mid-2023.

The property investment segment registered fairly steady revenue of RM582.5 million in 9M2019 (9M2018: RM592.2 million). Most of the investment properties held directly under Sunway recorded high occupancy at end-June 2019. However, the properties under Sunway REIT, comprising retail malls, office and hotels, recorded mixed occupancy rates: the retail portfolio's performance remained resilient, achieving an overall occupancy rate of 95.5% (FY2018: 97.2%); the occupancy rate for the office portfolio stood at 74.5% (FY2018: 68.2%); and the hotel portfolio recorded a lower occupancy rate of 69.3% (FY2018: 74.2%).

During 9M2019, the group's cash flow from operations (CFO) declined by 38.2% y-o-y to RM216.9 million on the back of increased inventories. Adjusting the group's CFO to include interest income from its cash investments and dividend income from Sunway REIT, CFO interest coverage would stand at 2.68x in 9M2019. The stable outlook is premised on MARC's expectation that Sunway's credit metrics would remain broadly within the rating band; any sharp increase in borrowings or weakness in cashflow metrics could lead to downward rating action.