22 January 2016

RAM Ratings has reaffirmed the AA3/Stable/P1 ratings of Perbadanan Kemajuan Negeri Selangor's (PKNS or the Agency) RM300 million Islamic Commercial Papers Programme (2013/2020) and RM700 million Islamic Medium-Term Notes Programme (2013/2033). This is on account of the Agency maintaining its business position and delivering financial performance that came in within expectations despite the softer property market.

As a distinguishing feature from private property developers, the Agency is tasked to carry out the Selangor State Government's (SSG) property development and socio-economic agenda. PKNS is charged with providing affordable homes and to promote growth in less-developed areas. Given PKNS's important public policy role and strong relationship with the government, we believe that PKNS enjoys a moderate likelihood of extraordinary support from the SSG in times of need, despite being financially self sufficient. In the past, support by the SSG has been seen in low entry prices for PKNS's land purchases and soft loans from the SSG. On an ongoing basis, involvement by SSG is evident via board representation and supervision over its business activities.

Reflective of the softer property market, PKNS - as a developer of mass housing - also experienced a weaker performance. After a relatively strong showing in 2013, PKNS's top line has been declining, coming in at RM807.8 million for 10M FY Dec 2015 (FY Dec 2013: RM1.49 billion). Access to financing for some of PKNS's prospective customers remained tight while the implementation of the GST since April 2015 has further dampened demand. Several property projects that were slated for launch this year have also been deferred to 2016. Resultantly, the Agency's unbilled property sales dipped to RM450 million as at end-June 2015 from RM652 million a year earlier. That said, given its low land-holding costs, PKNS is viewed to be in a relatively good position to tide over the weaker market.

Over the next decade, the Agency has lined up many offerings in the higher end of the market, featuring large-scale mixed-commercial developments. While earnings from these potentially more-lucrative projects could help cushion PKNS's social obligation of having to subsidise affordable housing, such plans appear ambitious particularly as PKNS remains untested in this segment. RAM's concerns are over the high execution and demand risks given its lack of branding in this space, not to mention the sizeable outlays. Compared to traditional township developments, PKNS also has less flexibility to space out development in accordance to market conditions.

With the Agency still eyeing land purchases coupled with hefty land conversion premium payments over the next 2 years, debt requirements are anticipated to rise further even after having jumped over the past few years. That said, the Agency's balance sheet remains strong. Its gearing and net gearing ratios clocked in at a respective 0.17 times and 0.09 times as at end-October 2015, measuring favourably against other property developers. We estimate that its gearing ratio could increase to 0.3 times which would still be healthy. Meanwhile, its operating profit before depreciation, interest, and tax debt cover plunged to 0.17 times (annualised) for 10M FY Dec 2015 (FY Dec 2014: 0.34 times) - albeit still within the low end of our expectation.

To ease its funding needs, the Group could enter into arrangements with private developers to unlock the value of its huge land bank of more than 10,000 acres. Furthermore, the Agency's excellent financial flexibility is also underscored by its large pool of unencumbered assets comprising buildings as well as quoted and unquoted shares.

-Ends-


Media contact
Peter Kong, CFA
(603) 7628 1029
peterkong@ram.com.my

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