RAM Ratings reaffirms Silver Bird's ratings, maintains negative outlook

Published on 22 July 2011

RAM Ratings has reaffirmed the A2 rating of Silver Bird Group Berhad’s (SBGB or the Group) RM70 million Serial Bonds (2005/2012), as well as the A2/P2 ratings of its RM30 million Commercial Papers/Medium-Term Notes Programme (2005/2012). Meanwhile, the negative outlook on the long-term ratings has been maintained. The reaffirmed ratings reflect SBGB’s market position as the second-largest player in the domestic premium-bread market, stable demand for its products, its extensive distribution network and improved financial profile.



In FYE 31 October 2010 (FY Oct 2010), SBGB’s operating profit before depreciation, interest and tax climbed up 13.1% year-on-year to RM31.89 million, led by the better showing of its consumer-food division, which produces the High 5 and Silver Bird brands. The division’s sales had increased after having serviced more outlets. Meanwhile, following private share placements and related warrant conversions, SBGB managed to lighten its debt load by 13% to RM141.44 million as at end-FY Oct 2010, using the cash proceeds from these exercises. Coupled with its enlarged shareholders’ funds, its adjusted gearing ratio eased to 0.94 times (end-FY Oct 2009: 1.54 times). Given its lower debt level and – to a smaller extent – better profitability, SBGB’s adjusted funds from operations debt cover (FFODC) strengthened from 0.20 to 0.26 times.

Considering the growth potential of its operations, the Group’s FFODC is expected to range around 0.25-0.3 times over the next 2 years. Given its planned capital expenditure of around RM35 million to expand the production capacity of its core operations, its adjusted gearing ratio is expected to stay at around 0.9 times over the same span. On 15 June 2011, SBGB entered into a Shareholders’ Agreement with KPF Holdings Sdn Bhd, a wholly owned subsidiary of Koperasi Permodalan Felda Malaysia Berhad (FELDA), under which the Group will be involved in the distribution of agriculture-based food and the manufacture of dairy products. We caution that if this venture entails higher-than-expected capital expenditure/working capital, SBGB’s financial profile may worsen.

Meanwhile, SBGB’s shrinking market share remains a concern. Although SBGB’s sales volume has been increasing, Gardenia Bakeries (KL) Sdn Bhd’s (Gardenia Malaysia) has been advancing faster, driven by its capacity expansion. The Group’s growth may have also been impeded by allegations of non-compliance with certain regulations more than 4 years ago which had eventually been dismissed. While the decline in SBGB's market share was halted in FY Oct 2010, it remains to be seen if it can improve its market share. The Group’s credit profile is also constrained by the gradual removal of subsidies on core inputs that may affect its margins, the more competitive landscape of the bread-manufacturing business, and its loss-making operations in Singapore.

“While SBGB has been able to improve its financial metrics and halt the decline in its market share, we have maintained the negative rating outlook to reflect our concerns over its future ability to expand its market share. SBGB’s ability to preserve its margins is also a concern as the upward price revisions for its consumer foods (in June 2011) may not sufficiently offset rising input costs. In addition, the Group may be exposed to new risks arising from its agreement with FELDA,” observes Kevin Lim, RAM Ratings’ Head of Consumer and Industrial Ratings.

The ratings may be downgraded if SBGB’s market share and profitability deteriorate further, or if it faces more operational risks from its new ventures (which would affect its financial profile). On the other hand, the rating outlook may be revised to stable if SBGB is able to improve its market share, sustain its healthier margins and adequately address the risks from its new business foray.

Media contact
Low Pui San
(603) 7628 1051
puisan@ram.com.my