KUALA LUMPUR (Feb 6): RAM Rating Services Bhd (RAM Ratings) has reaffirmed the AA2/stable rating of UEM Group Bhd’s (UEM) Islamic medium term note (IMTN) Programme of up to RM2.2 billion (2012/2042), which was issued through funding vehicle United Growth Bhd (United Growth).

"The rating continues to reflect the group’s diverse businesses and the sturdy positions of its key operating companies, while incorporating expectations of government support in times of need," RAM Ratings said in a statement today.

Being wholly-owned by the government's investment-holding arm Khazanah Nasional Bhd, UEM has a strong corporate lineage, the ratings agency said.

The group is viewed as playing an important role, underpinned by its holdings of concessions in strategic local tolled roads and large tracts of land in Iskandar Puteri, a component of the Government’s Iskandar Malaysia economic corridor, RAM Ratings added.

"The likelihood of government support for the gorup in times of need is deemed moderately high," the statement said.

UEM's core business segments comprise expressways, engineering and construction, township and property development, as well as asset and facility management (AFM).

"Stable earnings from the group’s local expressways will continue to provide a buffer against cyclical challenges. Furthermore, UEM’s key operating companies have strong business profiles, underscored by concessions for strategically-aligned local highways and their leading positions in the property, AFM and cement industries,” the ratings agency added.

Nonetheless, the group’s stand-alone credit profile is moderated by its substantially lower profit in its financial year ended Dec 2016 (FY16), which fell 77% year-on-year, due to losses sustained by its construction arm and its Indonesian highway asset. Reduced profits at its AFM, property and cement businesses also weighed on earnings.

High debt levels also kept UEM’s adjusted funds from operations debt cover (FFODC) at less than 0.10 times in FY16.

However, the group registered a stronger pre-tax profit (up 55% y-o-y) in the first half of FY17, largely due to stronger profit from its property and AFM operations, which offset weak bottom line at its cement business.

"This, coupled with dividends received from its key toll-road joint venture — PLUS Malaysia Bhd (PLUS) — towards the end of 2017, is envisaged to substantially improve the group’s full-year profit performance. [But] UEM’s ability to sustain stronger profits could remain challenged by tough property and cement market conditions," RAM Ratings noted.

The group’s FFODC may improve in fiscal 2018 if its debt load is pared down with proceeds anticipated from disposal of its stake in Opus International Consultants Ltd, the completion of its first Australian property project (from 4Q 2018) and the disposal of lands in Johor, the ratings agency added.