The reaffirmation reflects the rating agency’s view that PKNS will maintain its sturdy balance sheet and will gradually restore its debt coverage on the back of its improving property sales.
The debt notes comprise of the RM300mil Islamic commercial papers programme (2013/2020) and RM1.7bil Islamic medium term notes, with a combined limit of RM1.7bil.
RAM pointed out PKNS also enjoys extraordinary support from the Selangor State Government.
In contrast to private developers, PKNS plays an important public policy role and is tasked with spearheading socio-economic growth in Selangor, particularly providing affordable homes and establishing townships to catalyse less-developed areas.
PKNS’s importance is also underlined by state and federal government representation on its board of directors.
RAM noted that PKNS had healthy gearing and net gearing ratios of 0.25 times and 0.16 times, respectively (end-December 2016: 0.18 times and 0.09 times), despite a heavier debt load of RM1.48bil as at end-June 2017 (end-December 2016: RM1.07bil).
“Barring heftier-than-anticipated capex and debts, we expect the Agency’s gearing to rise, albeit staying below 0.40 times and stacking up well against that of peers.
“PKNS also derives excellent financial flexibility from its 9,440-acre land bank.
“Nevertheless, the Agency registered very weak debt coverage, with its funds from operations debt coverage (FFODC) unexpectedly reducing to 0.02 times in FY Dec 2016 (FY Dec 2015: 0.05 times), mainly attributable to lacklustre property sales in the preceding years,” it said.
RAM also pointed out PKNS’ sales had been hampered by the slow take-up of PKNS’s pricier projects amid the soft property market, as well as a low loan approval rate among buyers and heightened competition in the low-cost segment.
Nevertheless, PKNS’s property sales had improved starting FY December 2016 and are expected to gradually translate into progress billings and cash flows in subsequent years.
“Provided its operating profit margin does not deteriorate further, a meaningful recovery in PKNS’s FFODC is only likely in FY Dec 2019.
“That said, our analysis has been somewhat hampered by insufficient information from the agency, limiting visibility of PKNS’s business direction and earning prospects in the near future.
“In view of the delicate task of balancing its commercial and social obligations, PKNS’s ability to determine its property mix and pricing is somewhat limited by its public policy role,” it said.
RAM pointed out PKNS has to proceed with affordable housing projects despite soft market conditions or economic downturns, to which buyers of mass-market homes are sensitive.
Recall that PKNS has committed to delivering 13,000 units of affordable homes under the Selangor Government’s Rumah Selangorku programme by 2020, which PKNS is likely to substantially subsidise. This will, in turn, crimp its profit margins.
To compensate for its lower-margin offerings, PKNS has lined up several large-scale high-end projects.
“While their slow rollout alleviates concerns over hefty funding needs in the near term, these projects are viewed as carrying high execution and demand risks, given stiff competition and the PKNS’s still short track record in the segment.
“Meanwhile, although frequent changes in the PKNS’s top leadership in the past three years may affect the momentum of execution of its strategies, the agency is supported by a governing committee that oversees its business plans,” it said.