Our view on YNH Property Berhad

Earlier in October, YNH’s external auditor issued a qualified opinion on the group’s financial statement regarding their joint venture and turnkey contracts for property development work. A qualified opinion typically is given by an auditor when the auditor is not confident with certain parts of the statement and cannot confidently clear the financial statement. Following that, they have appointed external firms to conduct a special review and provide legal opinion over the Joint Venture Agreements and contracts which is expected to be completed by April 2024.

However, recent market developments of YNH Berhad have left investors concerned, with share price declining 70% from RM4.04 at the start of the year to RM0.86 as of 19 January 2024, triggering an Unusual Market Activity query from Bursa Malaysia. The reply to the query by the Group did not provide any additional information on the continuous drop, citing that The Board is considering proposals to sell certain landed properties and are unaware of any other possible explanation to account for the trading activity.

Will YNH bonds be affected?

Currently, there is still no conclusive explanation on the recent decline in share price and we cannot ascertain whether the decline is linked to the recent auditor’s qualified opinion. We do think that the qualified opinion issued raises an eyebrow for investors as the auditor states that they could not obtain sufficient appropriate audit evidence that the joint venture and turnkey contracts entered into with the respective joint venture parties or landowners are not related party transactions, and on the value of these inventories as at 30 June 2023 and the related disclosures. Given the sum of these contracts amounts to roughly RM1.1b which in effect represents 45% of their total assets, it does represent a significant portion of the assets tied as deposits to those contracts.

Nevertheless, disregarding the current audit situation and looking solely at YNH’s financials, their debt levels are elevated with a net debt to equity ratio of 1.48x while short-term liquidity seems tight with cash and cash equivalent of RM17 mil against short term borrowings of RM520 mil. Current cash flow from operations for their Q1 ending September 2023 remains modest at RM14 mil, signaling a weak cash flow metric. As such, YNH has planned an asset monetisation exercise for their properties, 163 Retail Park in Mont Kiara and AEON Seri Manjung in Perak with targeted proceeds of RM592.5 mil. However, as of today, the asset monetisation exercise has been delayed and expected to be completed by Q1 2024.

With their short-term liquidity remaining tight, their asset monetisation and refinancing capabilities remains key in meeting their short-term debt obligations. However, we think that due to the current events surrounding the group, most investors and lenders may be taking a step back and waiting before committing anything. Furthermore, a weaker share price and lower market cap also directly affects the group’s ability to tap into the equity market for financing. As such the lack of refinancing options may snowball into a worst-case scenario of YNH being unable to meet their short-term debt obligations.

For holders of the group’s Islamic Medium-Term Notes Programme, the outlook for the Sukuk remains negative, considering the weak liquidity position as seen in their low cash levels and further delays in the asset monetisation of their malls delaying a much-needed cash infusion to the company. The rating agency MARC also downgraded the Sukuk Programme to a BBB+ due to liquidity concerns and asset sales delays, subsequently adding them in their MARCWatch Negative placement.

In the event of a worst-case scenario where a default happens, we think that debt holders will have some recovery value owing to the land charged as collateral for the debt as shown in the table below.

Table 1: YNH bonds and their security cover

As seen, the security for the bonds provides at least a 1.5x security cover based on their latest market valuation. Holders of the 2 sukuk are ranked pari passu and will share the proceeds of the land sales if a liquidation happens in the case of a default.

Furthermore, the terms are different for the perpetual as holders of the Tranche 1 perpetual are in a better position if winding-up does happen. This is because of their first legal charge over the security which means that they will be given first priority over the proceeds of the liquidation of said land with the residual amount used to pay the owners of the second tranche.

However, investors should note that for the perpetual there will be no event of default that will entitle any amount under the perpetual to be immediately due. As such, in a worst-case scenario, the group can perpetually defer the coupon payments to investors which does not constitute a default. Consequently, investors will have to wait for a court order or effective resolution to pass for the liquidation, winding up or dissolution of the issuer before the amounts of the perpetuals can be deemed immediately due.

Our Recommendation

As such, we suggest investors to consider selling their positions in YNH bonds due to their current liquidity position, weakening business profile and issues surrounding the group. However, do note that with recent developments, market liquidity for the bonds may be minimal. Nevertheless, for investors considering to hold or is still holding, the 1.5x security cover will provide some recovery value in a worst-case scenario.