Published on 07 Jan 2022.
RAM Ratings has reaffirmed Saudi-based Dar Al Arkan Real Estate Development Company’s (Dar Al Arkan or the Group) respective long and short-term corporate credit ratings of A3 and P2. The long-term rating has a stable outlook.
The reaffirmation is based on the expectation that Dar Al Arkan will be able to maintain credit metrics that are commensurate with the ratings on the back of the Group’s solid business fundamentals, healthy balance sheet and strong liquidity position.
In 9M FY Dec 2021, the Group’s revenue rebounded by 18.6% y-o-y, consistent with the recovery of the Saudi residential property sector, which recorded a 17% y-o-y increase in transaction value. The property market benefited from the Saudi government’s measures to accelerate home ownership, as well as economic recovery amid higher average crude oil prices, the rollout of vaccinations, and the easing of pandemic-related restrictions. The Group’s performance nevertheless has yet to recover to pre-pandemic levels due to delayed recognition of revenue from retail land and residential unit sales as the COVID-19 crisis hampered the work progress of projects. Dar Al Arkan has around SR3.3 bil of unrecognised project sales, an indication that it has started to successfully diversify away from its traditional core business of bulk land sales.
As at end-September 2021, the Group successfully pared down its debt levels by 3.4% y-o-y to SR10.1 bil. As a result, Dar Al Arkan’s net gearing remained healthy at 0.30 times (end-December 2020: 0.29 times). That said, funds from operations (FFO) net debt coverage stayed thin and unchanged at 0.12 times as at the same date due to its still hefty debt load. As residential market recovery is anticipated to continue, we expect Dar Al Arkan’s FFO net debt cover to improve to around 0.15 times in the near term under our stressed case projections, barring significant new sukuk issuances and borrowings.
Despite debt coverage metrics staying weaker than pre-pandemic levels, the Group’s liquidity position is still strong with cash reserves of SR4.4 bil as at end-September 2021, which amply cover short-term debt obligations of SR2.3 bil. Further comfort is derived from the financial flexibility that the Group has in view of sizeable unencumbered land holdings and leasing assets amounting to SR22.2 bil as at the same date. The large land bank allows Dar Al Arkan the flexibility to time land acquisitions.
Dar Al Arkan is the largest real estate developer in Saudi Arabia, with an established track record and vast land bank. The Saudi property sector has bright longer-term prospects, supported by the country’s young demographics and the government’s commitment to promoting home ownership. The volatility of the Group’s land sales and margins are however rating moderators, as are increasing execution challenges, exposure to market cyclicality and susceptibility to geopolitical risk.
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Thong Mun Wai
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Published by RAM Rating Services Berhad
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Ratings on Dar Al-Arkan Real Estate Development Company