MARC has assigned preliminary ratings of AAIS/AA to special purpose vehicle OSK Rated Bond Sdn Bhd’s (OSKRB) proposed Sukuk Murabahah/Multi-Currency Medium-Term Notes Programme (Sukuk/MCMTN) with a combined limit of up to RM2.0 billion. The ratings outlook is stable. The assigned ratings apply to ringgit-denominated sukuk/notes issued under the programme.
Wholly owned by OSK Holdings Berhad (OSK), OSKRB was set up to undertake the Sukuk/MCMTN programme, proceeds of which will be on-lent to the group. MARC has equalised the ratings of the issuance under the programme to OSK’s corporate credit rating based on the unconditional and irrevocable guarantee extended by the parent to the programme. OSK is a non-operating investment holding company with key subsidiaries involved in property development and capital financing, and has a substantial stake in RHB Bank Berhad, a major domestic bank in the country.
OSK’s AA corporate credit rating is driven by a well-established operational track record in its key businesses, a low leverage position and strong financial flexibility that partly stems from its 10.13% stake in RHB Bank. This stake, which has provided a substantial dividend income stream to the group in recent years and remains a strong source of liquidity, is a rating consideration.
OSK’s property development is characterised by few and staggered launches, risk sharing through joint-venture arrangements, large unbilled sales of RM1.3 billion, and low property inventory of RM16.0 million as at end-June 2020. It has an ongoing gross development value (GDV) of RM3.3 billion. This includes township developments Bandar Puteri Jaya in Sungai Petani and Iringan Bayu in Seremban, as well as joint developments Agile Mont Kiara in KL and the Melbourne Square (MSQ) in Melbourne, Australia, its first and only foreign property project. The domestic projects have achieved an overall take-up rate of 78% while MSQ has a take-up rate of 77%. The healthy response could be attributed to the group’s property strategy of avoiding extensive launches, particularly in the current weak environment.
OSK’s other key business is capital financing, through which it has built a loan portfolio of RM864.3 million by end-June 2020 (end-2018: RM566.0 million). Lending is on a relatively short-term basis (tenure ranges from 2 to 48 months) and is well collateralised. Non-performing loans have remained low, standing at 1.7% as at end-2019. MARC expects both property development and capital financing to remain the mainstay of the group’s financial performance over the medium term, supported by a modest income stream from property investments, and moderate but steady earnings, circa between RM26 million and RM33 million p.a., from the manufacture and sale of power cables and industrialised building system.
At the group level, revenue hovered around RM1.2 billion p.a between 2017 and 2019 but adjusted profit before tax (on excluding gain on disposal) grew sharply from RM254.3 million to RM470.5 million over the same period on the back of higher-margin properties sold and lower finance costs. For 1H2020, however, it recorded lower y-o-y revenue of RM430.3 million and adjusted pre-tax profit of RM151.7 million (1H2019: RM600.3 million; RM200.5 million) which was due to fewer property launches and the impact from the COVID-19 pandemic during the period. Group borrowings have remained relatively flat at about RM2.4 billion with a gross debt-to-equity (DE) ratio of 0.46x at end-June 2020. About 34% of the group’s borrowings reside in its property operations with the bulk of the remainder in capital financing and investment holding. Excluding capital financing, the group’s borrowings would stand at RM1.7 billion, translating to low adjusted gross and net DE ratios of 0.32x and 0.20x. In the medium term, the group’s DE ratio is projected to range between 0.48x and 0.55x, including the expected initial issuance of about RM500 million under the rated programme which will be mainly used to refinance OSK’s existing unrated MTN/Sukuk and to part fund its working capital requirement.
At the holding company level, OSK derived dividend income of RM278.3 million in 2019 (2018: RM174.3 million) of which RHB Bank contributed RM103.6 million or 37.2% (2018: RM71.1 million or 40.8%). OSK’s equity stake in RHB Bank is valued at about RM3.1 billion at end-2019, or 37.4% of the group’s total assets. At the holding company level, borrowings have been low at around RM305.3 million.
The stable outlook assumes OSK will maintain its credit metrics through a continued cautious stance in property development by maintaining low inventory levels, and a conservative approach to capital financing activities such that NPLs are below 2.0%. MARC also expects OSK to continue to maintain a disciplined approach to its borrowing levels such that net gearing is not more than 0.5x.