MARC Ratings has assigned a preliminary rating of AA-IS to LBS Bina Group Berhad’s proposed Islamic Medium-Term Notes Programme of up to RM750.0 million. The rating outlook is stable.
The assigned rating is mainly premised on LBS Bina’s strong sales track record in the affordable and mid-market residential property segment, its sizeable unbilled sales and healthy cash flow metrics. Moderating the rating is the potential increase in borrowings for property development that would weigh on its leverage metrics. Exposure to the cyclical property market is also a rating concern.
LBS Bina’s sales performance is reflected by a strong overall take-up rate of 76% for its ongoing developments (some just recently launched) with a gross development value (GDV) of RM7.1 billion as at end-August 2023. The solid sales performance is the result of the group’s focus on affordable and mid-range properties in the Klang Valley where demand has been resilient in the current challenging market conditions. The bulk of its ongoing projects are in the 633-acre KITA@Cybersouth township in Dengkil and the 470-acre LBS Alam Perdana township in Puncak Alam. Earnings in the medium term will be driven by sizeable unbilled sales of RM2.5 billion as at end-July 2023, which are more than sufficient to fund the construction of ongoing developments.
MARC Ratings understands that over the next two to three years, the group is expected to launch new phases of its existing Klang Valley developments. These developments consist of about 13,000 units with a combined GDV of RM7.1 billion. Long-term development opportunities would be supported by its sizeable landbank of more than 2,900 acres which are largely located in Kuala Langat and Cyberjaya in the Klang Valley, and Batu Pahat and Kota Tinggi in Johor.
The rating agency notes that group revenue has remained healthy; in line with the strong take-up of its projects, inventory levels have declined to RM101.6 million as at end-1H2023 from RM232.2 million as at end-2021. LBS Bina’s operating profit margins have also remained steady at 16%-19% over the past five years. Profitability has been supported by the adoption of the industrialised building system (IBS) in most of its projects. LBS Bina’s construction subsidiary, MGB Berhad, uses the IBS construction method which improves productivity by minimising material wastages and having quicker turnaround times.
As with industry peers, LBS Bina could experience cyclicality in cash flows, depending on the developmental phases and scale of individual projects. Notwithstanding the cyclicality, the group has been able to consistently generate positive cash flow from operations (CFO) since 2019. CFO interest and debt coverage stood strong at 4.14x and 0.18x as at end-1H2023. The group had unencumbered cash and bank balances of RM136.4 million, with a further progressive release of RM77.0 million from its Housing Development Accounts (HDA) following the completion of several projects in 2022 and 1H2023.
Gross and net debt-to-equity ratios stood at 0.68x and 0.44x as at end-1H2023. The group plans to draw down up to RM200.0 million under the rated sukuk in 2023 mainly for refinancing, as well as RM411.6 million in bank financing for its projects between 2023 and 2025. Borrowings are expected to rise to around RM1.25 billion in 2025, which could lead to an increase in leverage.