Update on Tropicana’s Exchange Offer and our latest views

We provided our view on the exchange offer and opined that it is a fair deal for investors and they should proceed with the exchange offer.

Following that, the Extraordinary Resolution to vote for the exchange of all the Existing Perpetual Sukuk during the EGM convened on 8th October 2024 was NOT passed, as the total votes for the Extraordinary Resolution did not meet the required 75% majority.

What this means for existing Tranche 1 Perpetual investors

Table 1: Summary of outcomes for investors

Based on the summary of outcome, investors who have voted to accept the Exchange Offer will likely be exchanging for the New Sukuk. The timing of the exchange as indicated by the management will be subjected to the issuance of the New Sukuk which is targeted to be by the end of October.

On the other hand, investors who voted against the Exchange Offer will continue to hold the Existing Perpetual Sukuk. Though we opine that upon the successful issuance of the RM450 million senior sukuk, the Company will proceed to call the remaining Existing Perpetual Sukuk upon the next call date in March 2025 given the coupon reset clause, which the coupon rate of the Perpetual Sukuk will surge to around 9%.

Our latest view on Tropicana

Our previous article on Tropicana, Uncertainty looms as Tropicana Corporation faces tight liquidity addresses our concern surrounding Tropicana’s elevated debt levels, liquidity issue and declining performance. While we do still think there are concerns on their current debt levels, Tropicana is improving its liquidity situation. Here’s why.

Good progress on asset disposals

Our previous write-up mainly centered around their tight liquidity as consecutive poor performance in the past dragged their credit ratios to concerning levels with cash to short term debt at 0.42 times and interest coverage ratio at 0.86 times. We were also particularly concerned with the pace of their asset disposal and the lack of updates on these disposals.

Fast forward to today, we see their asset disposal materialising at a commendable pace, totaling RM 1.1 billion so far with additional disposals worth RM1.2 billion in progress. Key completed disposals and disposals in progress are detailed below.

Table 2: Summary of asset disposals

Healthier balance sheet going forward

Table 3: Tropicana Corp credit ratios

Proceeds from their completed asset disposal has helped Tropicana improve their overall balance sheet. Their total borrowings saw a 12% reduction to RM3.3 billion in 1H24, contributing to an overall lower net gearing ratio of 53%. Owing to the reduction in debt, the Group effectively reduced the interest expenses by 20%, representing savings of around RM35 million annually. Furthermore, asset sales proceed and positive cash flow from operation allowed them to improve their short-term debt repayment ability, indicated by their interest coverage ratio of 1.5x and a slight improvement in their cash to short term debt to 0.52 times.

We believe they could meet their short-term obligations, considering the upcoming cash injection of RM1.2 billion from the asset disposal to be completed by the end of FY24. With the completion, we project net gearing ratio to improve to a comfortable 50% with debt levels at around RM2.5 billion. With that, we expect their interest cost to see a further reduction of around RM 50 million, assuming debt levels at RM2.5 billion and 6% interest.

New Sukuk programme and sizeable landbank in Johor to support refinancing needs

Tropicana has recently announced a new RM1.5 billion Sukuk Wakalah programme, which was rated at A by Marc. We believe the programme will further support their ability to refinance existing debt, and the Group has already announced a new issuance of RM450 million Senior Sukuk under the programme. The new issuance will be used to refinance the first tranche of the perpetual totaling RM 273 million which was due to be called in 25 September 2025, benefitting them in reducing interest cost from the 9% step up coupon on the perpetual to the guided rate of 6.25% for the new Sukuk.

Additionally, with the current positive sentiment surrounding Johor, Tropicana is poise to benefit in future developments of these landbank. Secondly, the Group will also be able to benefit from the improved valuations of these landbank, allowing them to collaterise these assets for additional financing.

Profitability slightly improving with medium-term earnings visibility

Chart 1: Tropicana Corp Profitability

The Group’s operating profit in 1H24 improved considerably, largely due to increased progress billings across development projects and a reduction in cost. Despite lower revenues, we believe the group’s business remains strong, judging by their considerable unbilled sales of RM 2.4 billion as of May 2024 which will provide some earnings visibility in the short to medium term. Furthermore, the Group is looking to unlock the value of their landbank in Johor with planned development of Lido Waterfront Boulevard with a planned launch of a serviced residence with GDV of RM1.5 billion in the near term. Currently, Tropicana’s ongoing project carries a total GDV of RM5.5 billion.

Conclusion

Overall, since our last article on Tropicana, we see an improving balance sheet for the group and additional asset disposal progress bodes well to achieve their deleveraging targets. While Tropicana is improving its liquidity situation, we are still concerned about their elevated debt levels and would like to see a further reduction in their debt levels to the projected RM2.5 billion in FY25. By doing so we believe it will alleviate most of our concerns as their debt repayment pressure will be substantially lower and more manageable.

For the Perpetual Sukuk holders who vote for accepting the Exchange Offer, they could consider holding the new bond for a potential turnaround story of Tropicana, given the current potential of their landbank in Johor and their improving liquidity position.