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 rating agency also affirmed its 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 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 segments. Sunway management’s longstanding experience in these segments and the group’s diversified business portfolio are expected to place the group in a better position to weather the impact from the COVID-19 pandemic.

The rating action also factors in MARC’s expectations that Sunway will adhere to tight financial discipline in regard to its current and projected borrowings despite the sizeable limits afforded under the group’s various programmes for further drawdowns. At end-June 2020, borrowings stood slightly lower at RM9.3 billion (2019: RM9.6 billion), translating into an adjusted gross debt-to-equity (DE) ratio of 1.05x (on accounting for equity credit for its perpetual sukuk) and a net DE of 0.54x. The rating agency views that the proposed issuance of irredeemable convertible preference shares of up to RM1.1 billion by end-2020 would temper any increase in its leverage position.

Sunway’s healthcare segment will take up the bulk of capex over the next four years; the group plans to invest RM1.9 billion in three new hospitals and further expand existing hospitals to increase its bed count to 2,076 from 876 at end-June 2020. The continued expansion in healthcare operations in recent years led to an increase in revenue contribution from this segment; in 1H2020, this accounted for 18.0% or RM274.3 million of the group’s total revenue of RM1.5 billion, although start-up expenses of Sunway Medical Centre Velocity contributed to the segment registering a loss of RM20.4 million during the period.

Its key earnings generator continues to be the property development segment, which saw its pre-tax profit declining by 7.3% y-o-y to RM65.0 million in 1H2020, largely due to the restriction on sales and construction activities which hampered progress billings following the imposition of the movement control order (MCO) during the period. To date, the group has launched one project, a condominium development with a gross development value of RM560.0 million in Singapore. The group’s unbilled sales of RM3.2 billion as at end-August 2020 provide earnings visibility through 2024.

The group’s construction segment was sharply affected by the MCO, which led to its pre-tax profit declining by 65.0% y-o-y to RM29.1 million. Over the near term, prospects for the domestic construction industry is expected to remain challenging, although this is mitigated by the group’s fairly sizeable construction order book (external projects) of RM2.8 billion as at end-August 2020.

The performance of Sunway’s property investment segment was impacted by the closure of its retail and hotel operations, coupled with the rental rebates offered to its mall tenants. For 1H2020, revenue fell 49.1% y-o-y to RM189.8 million. The performance of the businesses is expected to remain pressured, though the extent of the impact will depend on the duration of the COVID-19 pandemic and the recovery from challenging economic conditions. However, the occupancy of most investment properties held directly under Sunway and Sunway REIT has remained stable. Sunway’s consolidated cash flow from operations (CFO) remained positive at RM138.7 million while adjusted CFO interest coverage stood healthy at 2.73x.

The stable outlook on the ratings reflects MARC’s expectations that Sunway’s credit metrics would remain broadly in line within the rating band and that the group would undertake necessary measures to temper any weakness in its credit profile.

Contacts:
Lim Wooi Loon, +603-2717 2943/ wooiloon@marc.com.my;
Taufiq Kamal, +603-2717 2951/ taufiq@marc.com.my.