MARC Ratings has assigned preliminary ratings of MARC-1IS /AA-IS to UDA Holdings Berhad’s (UDA) proposed Islamic Commercial Papers (ICP) programme of up to RM100.0 million and Islamic Medium-Term Notes (IMTN) programme of up to RM1.0 billion with a combined aggregate limit of up to RM1.0 billion with a stable outlook.
The assigned ratings incorporate UDA’s longstanding track record in property development, its healthy balance sheet characterised by a low leverage position, and recurrent income stream from investment properties. The ratings benefit from a one-notch uplift based on MARC Ratings’ assessment of UDA’s status as a wholly-owned entity of the Minister of Finance (Incorporated) (MoF) and its role in property development that is aligned with the Government of Malaysia’s (Government) socio-economic objectives. Moderating the ratings are the prevailing challenging property market conditions that have led to an increase in inventories and may impact its financial performance.
Since commencing operations about 50 years ago as a driver of urbanisation, UDA has expanded its role to encompass residential and commercial development in underserved areas in support of the Government’s social policies. In return, we note, the Government has provided grants and soft loans to UDA, partly due to the higher risk these projects entail. We also view UDA’s overall business strategy to balance its social-oriented projects with commercial projects as positive given the higher margin from the latter can offset that of the former.
UDA’s ongoing projects have moderate gross development value (GDV), standing at RM494.8 million as at end-September 2022. The average take-up rate has been modest at 37.2%, weighed down mainly by the slower response to 38 Bangsar, a high-end condominium project launched in September 2021. Excluding 38 Bangsar, the average take-up rate would be 54.5%. We also note the increase in inventory levels to RM340.4 million as at end-September 2022 (2021: RM292.4 million). About 52.4% of total inventory value or RM178.2 million is the value of unsold office units in its Legasi Kampung Baru project, of which the prospects are challenging in the near term.
UDA’s investment properties – mainly office buildings and shopping complexes – provide recurring rental income of about RM70.0 million p.a. The average occupancy rate of its commercial properties has been healthy at 87.9% as at end-September 2022, although operating profit has yet to recover to pre-pandemic levels, largely due to delayed reversal of rental waivers and discounts given during the pandemic. UDA also provides facility management services, among which are building management consultancy and audit services to some major corporations. These services provide stable income of about RM45.0 million p.a.
For 1H2022, group performance rebounded by 83.0% y-o-y in revenue to RM258.6 million. UDA has maintained a healthy balance sheet with a very low leverage position and a gross debt-to-equity (DE) ratio of 0.16x. Total borrowings stood at RM444.5 million which includes a treasury loan of RM165.3 million from the MoF that is expected to be converted into equity by 1Q2023. Based on the proposed initial drawdown of up to RM600.0 million under the rated IMTN programme that will be utilised for landbanking in the Klang Valley and working capital, the increase in borrowings will lead to a DE ratio of about 0.3x. MARC Ratings also notes that UDA has sizeable unencumbered landbank of about 1,014 acres with an estimated market value of about RM2.6 billion which provides a strong source of additional liquidity.