MARC has assigned a preliminary rating of AAIS with a stable outlook to S P Setia Berhad’s proposed RM3.0 billion Islamic Medium-Term Notes Programme. Proceeds from the proposed issuance will largely be used to fund capital injection into the group’s joint-venture Battersea Power Station project (Battersea Project) and refinance earlier borrowings undertaken to fund this project.
The key rating drivers are S P Setia’s well-established position as a township developer and good sales track record that has continued to provide strong earnings visibility. The rating also factors in S P Setia’s sizeable landbank with good transportation connectivity which would provide further prospects for property development. The rating is moderated by the prevailing weak property market conditions in Malaysia as well as in the UK where S P Setia has the ongoing Battersea Project in which it has a 40% stake. The assigned rating incorporates a one-notch uplift on the basis of our expectation of support from Permodalan Nasional Berhad (PNB) which has a 62.4% stake in S P Setia as at February 15, 2021.
S P Setia currently has 23 ongoing township and niche developments in Malaysia, focusing on landed residential properties in the mid-range segment. The majority of the group’s landbank of 8,528 acres is in the Klang Valley and has good infrastructure connectivity. Its ongoing domestic projects carried a total gross development value (GDV) of about RM9.4 billion as at end-December 2020 and had an average take-up rate of 68%, moderately higher than several of its peers, reflecting its strong market position.
The group’s earnings visibility over the next two to three years stems from its sizeable unbilled sales of RM4.1 billion from domestic projects, RM2.9 billion from the Battersea Project and RM3.1 billion from other foreign projects as at December 31, 2020. In 2020, the Battersea Project recognised an impairment of £62.4 million (RM336.3 million) on its work-in-progress and inventories under development due to expectations of a lower net realisable value under phase 2 and phase 3A. Coupled with some inventory write-downs, the group recorded pre-tax losses of RM156.7 million in 2020. As at end-2020, total borrowings stood at RM11.9 billion, translating into a gross debt-to-equity (DE) ratio of 0.78x (2019: 0.71x). Its major commitments over the next two to three years would be to meet the capital call of about GBP128 million (RM720 million) for the Battersea Project by 1H2022. The capital call, which will be partially funded through the sukuk issuance, is expected to increase the group’s gross DE ratio to about 0.80x. S P Setia has retained strong financial flexibility stemming from significant unutilised financing facilities and sizeable unencumbered landbank.