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MARC affirms its MARC-1IS(fg)/AAAIS(fg) ratings on LBS Bina Group Berhads Islamic Debt Programme

MARC has affirmed its ratings on LBS Bina Group Bhd's (LBS Bina) RM135 million Islamic Commercial Papers/Islamic Medium Term Notes (ICP/IMTN) Programme at MARC-1IS(fg) /AAAIS(fg) with a stable outlook. The affirmed ratings and stable outlook are underpinned by an unconditional and irrevocable Kafalah Guarantee provided by Danajamin Nasional Berhad (Danajamin) in relation to the Programme. MARC currently rates Danajamin's financial strength as AAA/stable on the basis of its important role as Malaysia's first and sole financial guarantee insurer, its status as a government-sponsored entity, its solid capital base and ample liquidity.

Bursa Malaysia-listed LBS Bina is a medium-sized property developer whose two main property projects, Bandar Saujana Putra in Kuala Langat, Selangor and D' Island Residence in Puchong, Selangor, are the main contributors to its recent and current financial performance. The 850-acre Bandar Saujana Putra, which is the group's flagship development, targets the low- and medium-end market segment and has continued to register strong take-up rates of about 90% for its recent launches. However, the sales performance of the recent phases of its D' Island Residence project, which is aimed at the higher end of the market, has been slow. MARC notes that LBS Bina's smaller projects, such as the Bandar Putera Indah project in Batu Pahat, Johor, have garnered modest responses, leading the company to defer future launches.

MARC foresees a continued softening in the residential property market in the near term, particularly in the high-end segment. As such, the group's sales target could be challenging to achieve for some of its developments. Mitigating the somewhat weaker outlook is the near-term earnings visibility provided by LBS Bina's unbilled sales of RM693.2 million as at March 31, 2012. In addition, the group's undeveloped land bank of 2,018 acres as at end-March 31, 2012, of which about 800 acres are in Selangor, should sustain the group's property development activities for a reasonable time frame.

For financial year ended December 31, 2011, the group recorded higher year-on-year (y-o-y) revenue of RM499.6 million (FY2010: RM340.9 million), bolstered by higher sales achieved from its projects in Bandar Saujana Putra. Profit before tax increased to RM62.78 million in FY2011 (FY2010: RM27.0 million), supported by the improved operating profit margin, which increased to 17.8% mainly as a result of higher selling prices of units in the D' Island Residence development. However, its cash flow from operations (CFO) turned negative due to increased working capital requirements on projects currently under construction, with the RM32.2 million cash flow deficit funded mainly by additional borrowings.

LBS group's debt-to-equity (DE) ratio rose to 0.95 times (x) (FY2010: 064x) as debt increased by RM137.2 million to fund the property development activities. MARC notes with concern that borrowings could increase from RM479.6 million to RM604.2 million if the group draws down on an approved RM124.6 million bridging loan facility, with the DE ratio potentially increasing to about 1.19x on a pro forma basis. LBS Bina's increased debt leverage and negative CFO indicate an overall decline in its credit metrics since MARC's last rating action on LBS Bina in October 2011. A potentially mitigating factor with regard to the pressure on LBS Bina's credit profile would be the successful divestment of its equity interest in wholly-owned subsidiary Dragon Hill Corp Ltd (Dragon Hill), either in whole or substantial part. The group is expected to use part of the proceeds from the proposed equity divestment to pare down its borrowings. Dragon Hill, through its subsidiaries, owns a 60% interest in a 36-hole golf course and development land surrounding the golf course in Zhuhai, China. As of June 26, 2012, LBS Bina has RM135.0 million notes outstanding under the IMTN programme, with principal repayments of RM40.0 million due in July 2013, against which RM28.7 million has been placed in a sinking fund account.

Overall, noteholders under the ICP/IMTN programme are insulated from any downside risks in relation to LBS Bina's credit profile by the guarantee provided by Danajamin. Any changes in the supported ratings or rating outlook would be primarily driven by changes in Danajamin's credit strength.

Contacts: Goh Shu Yuan, +603-2082 2268/ shuyuan@marc.com.my; Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my.

© Press Release 2012

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