MARC Ratings has affirmed its rating of AA-IS with a stable outlook on Malaysian Resources Corporation Berhad's (MRCB) Islamic Medium-Term Notes Programme (Sukuk Murabahah) of up to RM5.0 billion.

The Ratings agency said it affirmed rating mainly driven by MRCB's established property track record, particularly in transit-oriented developments (TOD), and further growth in its sizeable construction order book. The rating also incorporates the support extended by key shareholder, the Employees Provident Fund. These strengths are tempered by low operating margins for its construction contracts and the sizeable working capital requirements.

MARC noted that MRCB had an outstanding external construction order book of RM4.7 billion as at end-1H2024 which would provide earnings visibility through 2027. It also notes that the increased likelihood of securing new contracts, including the redevelopment of the Shah Alam Stadium and KL Sentral Station as well as the construction of five new LRT3 stations, would boost the order book by about RM4.7 billion. Due to the complexity of some of these projects, overall operating profit margin is expected to improve; in recent years, this has remained in the single digits, partly due to higher costs of materials and labour.

However, the rating agency views that MRCB would need to strengthen its liquidity position to support working capital requirements for the projects. In this regard, the group, which has low leverage with gross and net debt-to-equity ratios of 0.45x and 0.27x, has headroom to increase borrowing levels; under the RM5.0 billion rated programme, it currently has an outstanding of RM1.4 billion or 68% of total borrowings of RM2.1 billion. The group is also expected to monetise assets to support its working capital requirements.

For its property development segment, the total gross development value (GDV) for ongoing property projects stood at RM665 million as at end-June 2024. Additionally, while MRCB has staggered its launches in recent periods with the most recent one, Residensi Tujuh in Kwasa Sentral with a total GDV of RM385 million, being launched in October 2023, unbilled sales rose y-o-y to RM558.7 million. It recorded an average take-up rate of 39% as of end-June 2024. MRCB has also expanded its property projects overseas to reduce geographical concentration risk. In addition to the VISTA, a residential project in Gold Coast, Australia (GDV of AUD504 million), it will also embark on a TOD project above the City Rail Link Aotea station in Auckland, New Zealand (GDV of NZD452 million). Both projects will commence in 1H2025.

For 1H2024, revenue declined by 36.8% y-o-y to RM848.4 million, mainly on lower progress billings. Pre-tax profit, however, rose sharply to RM67.3 million (1H2023: RM35.8 million), largely due to a reversal of provisions for claims amounting to RM90 million. Cash flow from operations (CFO) was negative RM435.4 million given timing issues related to receivables for its property and construction projects. For 2024, the negative CFO is expected to narrow to around negative RM100 million. Cash balances stood at RM842.2 million as at end-June 2024.