MARC has affirmed its MARC-1/AA- ratings on Sunway Berhad’s issuances under the RM2.0 billion Commercial Papers/Medium-Term Notes (CP/MTN) Programmes, and MARC-1IS(cg)/AA-IS(cg) ratings on Sunway Treasury Sukuk Sdn Bhd’s issuances under the RM2.0 billion Sukuk Programme and RM10.0 billion Islamic Commercial Papers/Islamic Medium-Term Notes (ICP/IMTN) Programmes. All ratings carry a stable outlook. 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.
Sunway’s well-established market position in key business segments and its strong liquidity position remain key rating drivers. Its key businesses provide diversified earnings streams that have enabled the group to withstand the current challenging economic conditions. Its growing healthcare segment will further strengthen the group’s diversified income base. The key moderating factors are the weak domestic property market conditions that will weigh on sales and could lead to inventory build-up, as well as the uncertain recovery in the retail, leisure and hospitality segments even as pandemic-induced conditions have eased.
The group’s borrowings stood at RM7.3 billion as at end-June 2021, with gross and net debt-to-equity (DE) ratios of 0.71x and 0.57x. We expect Sunway to exercise financial discipline in regard to further drawdowns, particularly short-term facilities, despite the sizeable limits afforded under the group’s various programmes. We note that by end-June 2021, the group has reverted to a net current asset position, following a net current liabilities position of RM883.7 million as at end-2020 due to prior year adjustments.
For 1H2021, revenue and pre-tax profit improved y-o-y to RM2.0 billion and RM166.2 million. Property development was the key earnings contributor, recording pre-tax profit of RM43.6 million or 26.2% of group pre-tax profit. Going forward, earnings will be supported by sizeable unbilled sales of RM3.6 billion. Ongoing projects carried a gross development value (GDV) of RM7.5 billion as at end-June 2021, of which domestic projects accounted for 57% and Singapore 43%. It achieved take-up rates of 69.1% in Malaysia and 80.1% in Singapore. We view that its Singapore projects will continue to record better take-up rates given the strong demand for residential properties in the island state. However, its Malaysian property projects could face greater challenges to recover from the impact of the pandemic and property overhang. Against this backdrop, the group could run the risk of a rapid build-up in inventory, which stood at RM445 million as at end-1H2021. Its property investment segment has continued to incur losses from the closure of its retail, leisure and hospitality operations.
Sunway’s ongoing construction order book (external projects) of RM2.3 billion as at end-June 2021 provides earning visibility through 2023. This segment recorded a 24.6% y-o-y higher pre-tax profit of RM36.3 million in 1H2021. Sunway’s healthcare segment has continued to expand in recent years, leading to stronger contribution to group revenue. During 1H2021, this segment’s revenue grew 35.3% y-o-y to RM371.2 million with operating profit of RM47.1 million. Over the next three years, the group is projected to invest RM2 billion in three new hospitals and to expand its existing hospitals to increase its bed count to 2,366 from 862 at end-June 2021. We note and draw comfort from the fact that the proceeds from the group’s divestment of a 16% stake (on a fully converted basis) in its healthcare business to Singapore’s sovereign wealth fund for RM750 million will be mainly used to fund its healthcare expansion.