S&P: Damac Real Estate Development And Sukuk Notes Rated 'BB'; Outlook Stable [CPI Financial]
(CPI Financial Via Acquire Media NewsEdge) Standard & Poor's Ratings Services assigned its 'BB' long-term corporate credit rating to Dubai-based property developer Damac Real Estate Development Ltd. (Damac). The outlook is stable.
At the same time, S&P are assigning their 'BB' issue rating to the $650 million senior unsecured Sukuk notes due 2019, issued by special-purpose vehicle Alpha Star Holding Ltd. The corporate credit and issue ratings are in line with the preliminary ratings that S&P assigned on March 25, 2014, before the Sukuk issuance.
"The rating reflects our assessment of Damac's business risk profile as "weak" and financial risk profile as "intermediate," as our criteria define these terms. Our business risk assessment is based on our view of Damac's "moderately high" country risk exposure and the "moderately high" industry risk of property development. We view high-rise developers as highly cyclical companies with highly intensive working capital requirements. Growth prospects for Dubai's residential property segment appear to us to be positive in the next 12 months, thanks to population growth and an increasing number of visitors, which are likely to absorb the increasing supply of new developments and support average selling prices. We anticipate that residential property will retain its appeal as an investment class in the region. In our base-case scenario, we do not foresee an oversupply of residential properties in Dubai in the coming 12-18 months.
"We assess Damac's competitive position as "weak." The company has a high geographical concentration in the very cyclical Dubai property market, and has yet to prove itself in successfully delivering and selling large-scale, complex projects, for example the recent Akoya development. We also view as risks Damac's low share of recurring income from completed properties compared with peers like Emaar Properties PJSC; the high historical volatility of its profitability metrics, especially in 2008-2010; and the high level of competition Damac faces from government-related developers to source attractive land for new developments. Additionally, we consider that Damac's product range and position is relatively limited given its focus on luxury residential properties designed for high-income earners.
"On the other hand, we see favorable supply and demand trends for residential properties over the next 12-18 months in Dubai, which should support the company's growth prospects. Currently, Damac benefits from a strong order book (80 per cent projects scheduled for delivery in 2014 are sold), and has relatively limited land purchase commitments compared to its current sales rate. Other positive factors include the fixed-price structure of Damac's construction contracts, its recognized brand in the region, and its expanding sales network.
"Our assessment of Damac's financial risk profile as "intermediate" reflects our projection of strong credit metrics for 2014-2015, based on current sales rates and scheduled project deliveries. We believe that the company's business model of part-funding its working capital expansion with advance customer payments is positive from a cash flow perspective. However, we are mindful that property buyer confidence is very sensitive, and the rate of customer prepayments could decline quickly if sentiment in the Dubai property market turns negative, which would contribute to a rapid rise in working capital needs.
"Looking back at Damac's figures during the property downturn of 2008-2009, we note that cash from sales declined rapidly and the EBITDA base dropped by more than 50 per cent year-on-year. In our view, despite the management's focus on cash conservation in downturns, we believe that the risk of high internal cash flow volatility constrains Damac's financial risk profile. Nevertheless, over the next 12 months, we anticipate that the level of cash flow from sales and proceeds from the Sukuk issuance should enable Damac to maintain an "adequate" liquidity position, while meeting its business investment targets.
"Our base-case scenario for Damac in 2014-2015 assumes:
· Revenues from sales of properties and land of about AED 2 billion, based on a strong order book for 2014.
· An EBITDA margin of slightly below 50 per cent, taking into account a slight rise in average land and construction costs compared with revenue growth.
· An average cost of debt of around five per cent. Based on these assumptions, we arrive at the following credit metrics in 2014-2015:
· EBITDA and funds from operations (FFO) of around $900 million-$950 million;
· Total adjusted debt of around $650 million-$700 million;
· FFO to debt well above 60 per cent; and
· Debt to EBITDA of about 0.5x-1.0x."
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