Published on 24 Oct 2019.
RAM Ratings has revised the rating outlook on Dar Al Arkan Real Estate Development Company (the Group) to positive, from stable. Concurrently, we have reaffirmed the Group’s A3/P2 corporate credit ratings. The positive outlook reflects Dar Al Arkan’s ability to sustain the improvement in its debt-servicing metrics, despite the challenging market in the last few years. It has also maintained its healthy balance sheet and strong liquidity position.
The Group’s top line surged 35.4% to SR6.4 bil in FY Dec 2018, supported by another year of robust land sales. Nevertheless, its gross margins have thinned significantly in recent years. They used to hover around 40% until fiscal 2016, when they started shrinking to about 20%. This is attributable to the shorter holding period for land amid the weak market. Dar Al Arkan has been diversifying its revenue base since 2018, in a bid to reduce its reliance on bulk land sales and boost its sagging margins. Such efforts include the sale of retail land parcels and residential properties as well as venturing overseas.
Despite thinner margins, Dar Al Arkan was able to maintain its funds from operations debt coverage (FFODC) at 0.16 times last year (FY Dec 2017: 0.16 times). As sales are expected to decline in the near term, the Group’s FFODC is envisaged to clock in at 0.12 times in fiscal 2019 and 2020 - a level deemed adequate. Meanwhile, its respective gearing and net gearing ratios stayed healthy at 0.31 times and 0.13 times as at end-June 2019. Dar Al Arkan’s cash reserves amounted to SR3.5 bil as at the same date, amply covering its SR669.6 mil of debts maturing over the next two years. The Group also derives financial flexibility from its sizeable unencumbered land holdings and pool of leasing assets.
Besides its healthy balance sheet and strong liquidity position, the Group’s ratings are supported by its position as the largest real estate developer in Saudi Arabia, complemented by its sizeable land holdings. Nevertheless, these factors are moderated by the volatility of the Group’s land sales and margins, increasing execution risk, as well as exposure to market cyclicality and political instability in the Middle East.
The Saudi real estate market is showing early signs of recovery after four consecutive years of decline. Notably, transaction volumes and prices had dropped in major cities following the implementation of the Kingdom's white land tax, expatriate levy and value-added tax. In 1H 2019, however, the value of residential transactions in the Kingdom increased 27% y-o-y while q-o-q changes in its Real Estate Index turned positive. Looking ahead, the longer-term prospects of the Saudi property sector remain bright, supported by the Kingdom’s young demographics and the government’s commitment to promoting home ownership.
Thong Mun Wai
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Ratings on Dar Al-Arkan Real Estate Development Company