Published on 15 Jan 2021.
RAM Ratings has reaffirmed Saudi-based Dar Al-Arkan Real Estate Development Company’s (the Group) respective long- and short-term corporate credit ratings at A3 and P2. Concurrently, the outlook on the long-term rating has been revised to stable from positive.
The revised outlook is attributable to the Group’s weaker-than-expected financial performance and debt coverage amid the economic and property market slumps in Saudi Arabia, triggered by the COVID-19 pandemic and plunging oil prices. Heavier debt obligations since the last review have also eroded its debt coverage metrics. That said, the ratings remain supported by Dar Al-Arkan’s solid business fundamentals and strong liquidity position.
Notably, the recovery of the Saudi property market in 2019 had been short-lived as the pandemic, challenging economic conditions and heftier value-added tax (VAT) in 3Q 2020 had severely curtailed transactions in 2020. This had led to a 45% drop in Dar Al-Arkan’s revenue in 9M FY Dec 2020. Its funds from operations (FFO) consequently retreated 17% y-o-y. Meanwhile, land bank replenishment and pre-emptive liquidity management had pushed the Group’s debt level up to SR10.5 bil as at end-September 2020 (end-December 2019: SR7.9 bil), with a weaker FFO net debt coverage of 0.14 times (end-December 2019: 0.19 times). Given the near-term market challenges, we expect this metric to hover around 0.10 times over the next two years under our stressed case.
Despite its thinner debt coverage, Dar Al-Arkan’s balance sheet is still deemed healthy. As at end-September 2020, its net gearing ratio stood at 0.24 times while its liquidity stayed strong. The Group’s cash reserves amounted to SR5.8 bil, amply covering its SR2.9 bil of debts maturing over the next two years. The Group also derives financial flexibility from its sizeable unencumbered land holdings and leasing assets.
Dar Al-Arkan’s ratings are also supported by its position as the largest real estate developer in Saudi Arabia, complemented by its established track record and impressive land bank. Moreover, the Saudi property sector enjoys bright longer-term prospects, supported by its young demographics and the government’s commitment to promoting home ownership.
On the other hand, the said positives are moderated by the volatility of the Group’s land sales and margins, increasing execution risk, and exposure to market cyclicality as well as political instability in the Middle East.
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Published by RAM Rating Services Berhad
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Ratings on Dar Al-Arkan Real Estate Development Company