RAM Ratings upgrades Sunway on resilient property, construction

KUALA LUMPUR: Sunway Bhd’s ability to sustain its financial metrics amid a more challenging property market has prompted RAM Rating Services to revised upwards the outlook for its debt issues.

The ratings agency said on Tuesday it had revised the outlook on the A2 long-term ratings of Sunway’s debt issues from stable to positive.

“This was mainly premised on the group’s ability to sustain its financial metrics amid a more challenging property market, anchored by its resilient property business and growing contributions from its construction arm,” it said.

RAM Ratings said its debt load was in line with its expectation and the group’s operating cashflow debt cover (OCFDC) had exceeded its projection for a second straight year. 

“The gap between its gearing ratios and debt-protection metrics and that of its higher-rated peers had also narrowed. High unbilled sales and a strong construction order book should help tide Sunway over a slower property market,” it said.

RAM Ratings said Sunway’s property development business has demonstrated resilience against a challenging backdrop, through fairly steady property sales over the past few years, which proved its strong branding and good project locations. 

“Unbilled sales have hovered at a robust RM2.5bil, offering earnings visibility of 1.5 times the group’s sales for 2014. 

“Despite the softer market, the take-up rates of the Group’s recent project launches – including its maiden venture in Sunway Iskandar in 2014 – have stayed healthy. 

“For this year, Sunway expects flat sales growth, targeting the sale of RM1.7bil worth of properties, as achieved in 2014,” it said.

RAM Ratings said Sunway’s core pre-tax profit jumped 20.4% on-year to RM797.6mil in fiscal 2014. 

Except for the trading and manufacturing division, the better result was due to all its business segments, especially construction which constituted 18% of the group pre-tax profit (fiscal 2013: 12%). 

The ratings agency said with a strong outstanding order book of RM3.1bil as at end-fiscal 2014, Sunway’s construction arm will continue to contribute to the group’s earnings diversity, along with income from its investment properties. 

Although the replenishment of construction jobs in 2014 had slowed from the preceding year, Sunway’s track record – particularly in transport/rail-related projects – stands it in good stead to clinch future awards.

Following a rights issue in 2013 and a better-than-expected financial performance, Sunway’s balance sheet and debt-protection metrics have been healthier than anticipated. 

RAM Ratings said Sunway’s ratings could be upgraded should it retain its strong business position, while sustaining its net gearing ratio at a healthy 0.4-0.5 times. 

In addition, its OCFDC would be expected to stay above 0.15 times, or its funds from operations debt cover to range from 0.15-0.20 times.

“Sunway’s ratings remain moderated by its hefty absolute debt load and inherent exposure to the cyclicality of the property and construction sectors, the performance of which typically correlates with general economic trends. 

“Given its still-substantial reliance on property development (45%-50% of pre-tax profit), the group’s financial performance remains susceptible to the state of the property sector,” it said. 

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