Published on 10 Jan 2023.
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 RAM’s expectation that Dar Al Arkan will be able to maintain its improved credit metrics over the medium term. This is supported by a healthy Saudi Arabian property sector, which is a key beneficiary of the Kingdom’s strong economic growth and fiscal position, thanks to higher global oil prices, rising oil production and ongoing macroeconomic reforms.
Supported by the reopening of the Saudi Arabian economy, Dar Al Arkan’s revenue improved by 28% y-o-y to SR2.5 bil in FY Dec 2021, largely attributed to better land sales performance (FY Dec 2020: SAR1.9 bil). The Group recorded broader operating profit before debt, interest and tax (OPBDIT) margin at 29.4% (FY Dec 2020: 28.8%) due to a more favourable sales mix. The strong momentum was sustained into 9M FY Dec 2022 as the Group’s revenue jumped 77% y-o-y to SR3.0 bil, supported by higher bulk land sales as well as strong revenue recognition from off-plan retail land and residential developments. Dar Al Arkan’s OPBDIT margin also improved slightly to 29.9% due to higher selling prices. For the full year, the Group’s projected revenue and profits are expected to surpass pre-pandemic levels in FY Dec 2019.
Dar Al Arkan efforts to reduce its heavy reliance on bulk land sales by selling more retail land and residential properties off-plan are showing strong traction, addressing previous concerns on execution risks. Revenue recognition from retail land and residential property developments reached 37% of revenue in 9M FY Dec 2022 (FY Dec 2021: 9%). Higher contributions from these products reduce Dar Al Arkan’s dependence on bulk land sales, which will in turn improve revenue and earnings stability moving forward. Dar Al Arkan currently boasts SR8.5 bil of booked and unrecognised revenue from property sales, which will support earnings visibility over the next few years (previous review: SR3.3 bil).
Dar Al Arkan’s improved sales and profit performance have translated into stronger cashflows and net debt position. As a result, Dar Al Arkan’ net gearing and FFO net debt coverage ratios improved to 0.22 times and 0.28 times respectively as at end-September 2022 (end-December 2021: 0.28 times and 0.13 times). With its strong earnings visibility, we expect Dar Al Arkan’s FFO net debt cover to be maintained above 0.25 times under our sensitised projections.
Dar Al Arkan is the largest real estate developer in Saudi Arabia, with a strong 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. However, the volatility of the Group’s land sales and margins, exposure to market cyclicality and susceptibility to geopolitical risk remain moderating factors.
Thong Mun Wai
(603) 3385 2522
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Published by RAM Rating Services Berhad
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Ratings on Dar Al-Arkan Real Estate Development Company