14 September 2015
MARC has assigned ratings on Sunway group's existing debt and sukuk as follows:

  • RM2.0 billion 7-year (2013-2020) CP/MTN programme issued by Sunway Berhad at MARC-1/AA-; and
  • RM2.0 billion 7-year (2015-2022) ICP/IMTN Sukuk programme issued by Sunway Treasury Sukuk Sdn Bhd (STSSB) with Al-Kafalah guarantee from Sunway Berhad at MARC-1IS(cg) /AA-IS(cg).

The outlook on the ratings is stable. The ratings reflect Sunway group's (Sunway) strong business profile, stemming from its established market position and long operating track record in the property development, property investment and construction sectors. The ratings also factor in the group's strong liquidity and low leverage positions. These notwithstanding, the ratings remain limited by the cyclicality of Sunway's core construction and property activities as well as its modest geographical diversity.  

Sunway is an integrated property-cum-construction group whose activities are largely based in Malaysia and to a lesser extent, in Singapore. As at June 30, 2015 (1HFY2015), its construction division's outstanding order book stood at RM2.7 billion, providing earnings visibility for about two years. While 52.6% of the order book comprises external contracts, the remaining 47.4% is from within the group, underscoring the division's reliance on internally generated work flow. Competitive pressures and a potential slowdown of infrastructure projects pose medium-term concerns, which are somewhat buffered by Sunway's construction track record which stretches back to the 1980s. Following the listing of its construction division through Sunway Construction Group Berhad (SCG) in July 2015, Sunway diluted its stake in SCG to about 54%. The holding company, however, is not expected to retain the listing proceeds which are expected to be distributed to its shareholders. 

MARC notes that Sunway's ongoing property development projects have a total gross development value (GDV) of RM7.7 billion and have achieved an overall average take-up rate of 72.8 % as at end-March 2015.

Going forward, however, the take-up rates will be weighed down by the challenging outlook on the property industry, both in Malaysia and Singapore where the group has sizeable exposures of 56.2% and 42.4% respectively of GDV. For 1HFY2015, Sunway's property division registered RM478.0 million in sales and expects to achieve a target of RM1.7 billion by end-FY2015. MARC remains concerned that Sunway has a large exposure to Johor, in particular in the Iskandar region, which has faced increasing sales pressure from looming oversupply and weakening market sentiments. The state also accounts for 48.5% of its total effective undeveloped land bank of about 2,234.5 acres. Sunway's township projects with low plot ratios in Iskandar, its established reputation and the flexibility to delay launches provide mitigating factors. As at end-1HFY2015, the group has effective unbilled sales of RM1.7 billion which provide earnings visibility for about 18 to 21 months. 

Sunway's property investment, which includes investment properties held directly and under Sunway REIT, have a net lettable area (NLA) of 6,697,534 sq ft with an overall average occupancy rate of 85.2% for (FY2014: 85.7%). Additional investment properties which are expected to be completed by 1HFY2016, comprise Sunway Velocity Shopping Mall and Sunway Pyramid Phase 3. Contributions from Sunway REIT consist of about RM90.0 million in dividend and fee income annually.

For 1HFY2015, Sunway recorded unaudited pre-tax profit of RM474.4 million on revenues of RM2.1 billion (1HFY2014: RM375.8 million; RM2.2 billion). Unaudited cash flow from operations (CFO) was RM246.9 million while free cash flow was negative at RM197.7 million (1HFY2014: RM177.7 million; deficit RM399.9 million).

MARC considers Sunway's negative FCF to be manageable in view of its cash balances of RM1.7 billion and RM451.3 million in short-term investments as at end 1HFY2015. MARC expects the FCF deficit to widen by end-FY2015 after funding the construction of additional investment properties and acquisition of land in Kelana Jaya, Selangor.

Sunway's unaudited debt-to-equity (DE) ratio and net DE of 0.65x and 0.33x respectively as at 1HFY2015 were slightly higher than at end-FY2014. MARC estimates the DE and net DE to increase to between 0.80x to 0.90x and 0.45x to 0.50x respectively by end-FY2015 which are within the rating band. The outstanding balance under Sunway Berhad's RM2.0 billion CP/MTN is RM855.0 million and under its wholly-owned funding vehicle, STSSB's ICP/IMTN Sukuk programme, is RM800.0 million as at September 4, 2015. Total short-term maturities ranging from one to three months under these two programmes amount to RM1.3 billion. For prudent debt management, MARC expects Sunway to employ greater discipline in extending the group's debt maturity profile to be more aligned with its cash flow generation. MARC takes comfort in Sunway's debt servicing ability with high operating profit (before interest and tax) interest cover at 9.6x and CFO interest cover at 6.9x in FY2014. The rating agency also observes that Sunway has sufficient financial flexibility with unutilised credit lines of RM1.4 billion as at end-1QFY2015 and unencumbered assets with a market value of RM4.0 billion as at end-FY2014.

At the holding company level, Sunway's revenue from dividend income and management fee income was RM150.3 million and RM67.3 million respectively at end-FY2014 (FY2013: RM153.5 million; RM68.8 million).

Holding company debt stood at RM1.3 billion and the DE at 0.29x; the CFO generated has been sufficient to meet its financial obligations. 

The stable outlook reflects MARC's expectations that Sunway's credit metrics remain commensurate with the rating band. Rating pressures will develop should the group face a decline in its property and construction activities and/or adopt a more aggressive financial strategy that would impact its overall credit profile. Any improvement in the rating and outlook would need to be supported by a reduction in its debt position and a sustainable increase in cash flow generation.

Contacts: Ngiam Tee Wei, +603-2082 2268/ teewei@marc.com.my; +603-2082 2262/ nicola@marc.com.my; Yap Lai Ken, +603-2082 2247, laiken@marc.com.my.

© Press Release 2015