MARC has assigned a preliminary rating of A+IS to Tropicana Corporation Berhad’s (Tropicana) proposed RM1.5 billion Islamic Medium-Term Notes Programme (Sukuk Wakalah) with a stable outlook.
The assigned rating reflects Tropicana’s established market position in property development, steady performance and moderate leverage position. These strengths are supported by stable, albeit modest, recurring income from investment properties. The rating is mainly moderated by its heavy reliance on property and property-related activities given the prevailing weakness in the domestic property market that will be exacerbated by the economic impact from the COVID-19 pandemic outbreak. The stable outlook incorporates MARC’s expectation that the group will be able to withstand the near-term impact from the outbreak based on the group’s strong liquidity position vis-à-vis its financial obligations.
Tropicana has a long and established track record in property development, strengthened by the strong response to the Tropicana Golf & Country Resort, a resort-style development with a 27-hole golf course on 625 acres in Petaling Jaya. Its other key developments that are based on a similar resort-style concept have been well received. As at end-December 2019, the combined gross development value of its ongoing developments was RM3.8 billion. Its total unbilled sales of RM836.5 million provides earnings visibility over the medium term.
The group has, however, faced slower take-up rates for some property sub-segments such as shop offices and link houses within some of its developments. Tropicana’s property investments include three private school buildings in the Klang Valley from which it generates a stable but modest rental income. Its entry into the hospitality segment, with the recent completion of W Hotel in Kuala Lumpur, has also seen moderately improving revenue.
MARC notes that Tropicana has substantial landbank of about 2,167.5 acres as at end-December 2019 following the acquisitions of 1,121.6 acres of land from related parties for RM1.96 billion that were funded by the issuance of irredeemable convertible preference shares, and novation of borrowings from the related parties.
For unaudited 2019, Tropicana recorded a 31.5% y-o-y decline in revenue to RM1,120.4 million. Pre-tax profit, however, grew 19.6% y-o-y to RM383.1 million. Excluding one-off gains from the aforementioned land acquisitions, pre-tax profit would decline to RM46.1 million (2018: RM304.3 million) mainly due to fewer project completions and project launches.
Cash flow from operations (CFO), however, remained healthy at RM176.2 million for 2019. MARC notes that while the land acquisitions saw an increase in borrowings through debt novation to RM2.8 billion, Tropicana’s debt-to-equity (DE) ratio remained at 0.51x. Tropicana’s DE ratio is projected to rise to 0.60x from an increase in borrowings to fund its property development cost, which is expected to be about RM960 million over the near- to medium-term. Proceeds from the issuance will be utilised to part-fund its ongoing development as well as refinance some of its existing borrowings.