Published on 07 Jan 2022.
RAM Ratings has reaffirmed the AA2/Stable rating of UEM Group Berhad’s (UEM or the Group) RM2.2 bil Islamic Medium Term Notes (IMTN) Programme (2012/2042), issued through funding vehicle United Growth Berhad.
We have reaffirmed the rating despite UEM’s weaker standalone credit profile amid challenges faced by its key business segments, in view of our expectation of continued government support for the Group. This is premised on UEM’s strong links with Khazanah Nasional Berhad (the Malaysian government’s sovereign wealth fund) and UEM’s role as a custodian of key strategic assets of the government. This includes the Group’s portfolio of expressway concessions held under PLUS Malaysia Berhad (PMB) and its sizeable land bank in Iskandar Puteri, Johor.
The restructuring of UEM’s highway concessions, arising from the government’s implementation of an 18% toll cut on all highways held under PMB, remains unresolved. As containing the Covid-19 pandemic and driving the country’s post-crisis recovery remains a government priority, the prospect of a timely resolution of restructuring talks and resumption of dividends from PMB in the near term is dim. For now, our projections assume that PMB will restart dividend distributions in 2023 at lower than historical levels (2017-2019 average: RM271 mil). Dividends declared to the Group by PMB in FY Dec 2020 were ploughed back into the latter to conserve liquidity. Putting aside ongoing regulatory uncertainty, the long-term traffic profile of toll road concessions under PMB remains favourable, supported by their strategic alignments.
UEM Sunrise, the Group’s property development arm, continues to be weighed down by the concentration of its land bank in the challenging Johor market. It remained loss making in 1H FY Dec 2021 (FY Dec 2020: pre-tax loss of RM195 mil) owing to a subdued top line and asset impairments. We expect it to put on a better showing in FY Dec 2022 after the realisation of some land sales although sustained improvement will depend on steady project launches and sales. Working capital requirements for its upcoming Australian project (gross development value: AUD250 mil) may cause UEM Sunrise to post another year of operating cashflow deficit in FY Dec 2023.
Recent performances of UEM Edgenta Berhad (the Group’s asset and facility management (AFM) arm) have also been lacklustre on the back of a plunge in profits from the infrastructure services division, half the earnings of which are generated by maintenance work for highways under PMB. Lower traffic volumes owing to prolonged lockdowns and interstate travel restrictions dampened demand for non-critical maintenance work. We do not discount a potential revision to the maintenance contract with PMB amid PMB’s cost-cutting measures, although UEM Edgenta’s performance should still improve in the next two years from the low base in 2021.
After adjusting for concession-related borrowings under Konsortium ProHAWK Sdn Bhd (ProHAWK)1, UEM’s consolidated net gearing is anticipated to edge up to around 0.30 times by end-December 2023 (end-June 2021: 0.21 times), still remaining strong. Reflecting the continued absence of dividends from PMB and the y-o-y weaker performances of its property and AFM divisions, we expect UEM’s adjusted consolidated operating cashflow debt cover (OCFDC) remain in deficit for fiscal 2021 (fiscal 2020: 0.06 times). A somewhat better operating performance may lift cashflows but adjusted consolidated OCFDC will stay feeble at around 0.05 times through FY Dec 2023.
UEM’s weaker consolidated metrics are partly moderated by its sturdy business profile as a diversified conglomerate and healthy company-level metrics. As at end-June 2021, company-level cash balances came up to RM1,045 mil against total debt of RM343 mil. The management has set aside RM300 mil for the establishment of an endowment fund under Yayasan UEM. This, coupled with diminished dividend inflows and sustained dividend payouts to Khazanah, is expected to deplete much of its sizeable cash pile. That said, UEM will still be in a net cash or near net cash position at the company level where it has a modest debt load.
The rating of United Growth Berhad is linked to the credit profile of the Group as the former’s Islamic structure provides recourse to UEM by virtue of its obligations under a purchase undertaking.
1This follows the completion of Hospital Tunku Azizah in Kuala Lumpur, undertaken by ProHAWK.
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Thong Mun Wai
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