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Press Release
24 Jan | Wednesday
RAM Ratings reaffirms PKNS’s sukuk ratings

RAM Ratings has reaffirmed the AA3/Stable/P1 ratings of Perbadanan Kemajuan Negeri Selangor’s (PKNS or the Agency) RM300 million ICP Programme (2013/2020) and RM1.7 billion IMTN Programme (2013/2033), with a combined limit of RM1.7 billion. The reaffirmation reflects our view that PKNS will maintain its sturdy balance sheet and will gradually restore its debt coverage on the back of its improving property sales. The Agency also enjoys extraordinary support from the Selangor State Government (SSG). In contrast to private developers, the Agency plays an important public policy role and is tasked with spearheading socio-economic growth in Selangor, particularly providing affordable homes and establishing townships to catalyse less-developed areas. PKNS’s importance is also underlined by state and federal government representation on its board of directors.

PKNS posted healthy gearing and net gearing ratios of 0.25 times and 0.16 times, respectively (end-December 2016: 0.18 times and 0.09 times), despite a heavier debt load of RM1.48 billion as at end-June 2017 (end-December 2016: RM1.07 billion). Barring heftier-than-anticipated capex and debts, we expect the Agency’s gearing to rise, albeit staying below 0.40 times and stacking up well against that of peers. PKNS also derives excellent financial flexibility from its 9,440-acre land bank.

Nevertheless, the Agency registered very weak debt coverage, with its funds from operations debt coverage (FFODC) unexpectedly reducing to 0.02 times in FY Dec 2016 (FY Dec 2015: 0.05 times), mainly attributable to lacklustre property sales in the preceding years. Sales had been hampered by the slow take-up of PKNS’s pricier projects amid the soft property market, as well as a low loan approval rate among buyers and heightened competition in the low-cost segment. Nevertheless, the Agency’s property sales had improved starting FY Dec 2016 and are expected to gradually translate into progress billings and cash flows in subsequent years. Provided its operating profit margin does not deteriorate further, a meaningful recovery in PKNS’s FFODC is only likely in FY Dec 2019. That said, our analysis has been somewhat hampered by insufficient information from the Agency, limiting visibility of PKNS’s business direction and earning prospects in the near future.

In view of the delicate task of balancing its commercial and social obligations, PKNS’s ability to determine its property mix and pricing is somewhat limited by its public policy role. The Agency has to proceed with affordable housing projects despite soft market conditions or economic downturns, to which buyers of mass-market homes are sensitive. Of note, PKNS has committed to delivering 13,000 units of affordable homes under the SSG’s Rumah Selangorku programme by 2020, which the Agency is likely to substantially subsidise. This will, in turn, crimp its profit margins.

To compensate for its lower-margin offerings, PKNS has lined up several large-scale high-end projects. While their slow rollout alleviates concerns over hefty funding needs in the near term, these projects are viewed as carrying high execution and demand risks, given stiff competition and the Agency’s still short track record in the segment. Meanwhile, although frequent changes in the PKNS’s top leadership in the past 3 years may affect the momentum of execution of its strategies, the Agency is supported by a governing committee that oversees its business plans.

Analytical contact
Wang Wai Wah
(603) 7628 1110
waiwah@ram.com.my

Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my

Date of release: 24 January 2018

The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations

RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.

Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.

Published by RAM Rating Services Berhad
© Copyright 2018 by RAM Rating Services Berhad’s

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