RAM Ratings reaffirms Formis' ratings, maintains negative outlook

Published on 24 August 2011  
RAM Ratings has reaffirmed the respective long- and short-term ratings of BBB1 and P2 for Formis Resources Berhad’s (Formis or the Group) RM80 million Murabahah Underwritten Notes Issuance Facility/Islamic Medium-Term Notes Facility (2005/2012) (MUNIF/IMTN). At the same time, the negative outlook on the long-term rating has been maintained. Formis is involved in a diversified range of information, communication and technology (ICT) products and services.



The negative rating outlook reflects our concerns on Formis’ weakened business profile and profit-generating ability. Although there have been some signs of improvement for its subsidiary ISS Consulting Solutions Berhad (ISS), the recovery has taken longer than anticipated and its losses were larger than expected. Meanwhile, we have a negative view on Formis’ recent acquisition of a 20.6%-stake in Ho Hup Construction Company Bhd (Ho Hup), which is in an unrelated business. The investment may take a toll on the Group’s already-depressed profit performance, given Ho Hup’s years of loss-making position.

In FYE 31 March 2011, Formis suffered an operating loss before interest and tax of RM35.46 million. This was mainly due to increased costs following acquisition of ISS, as well as RM33.10 million of goodwill impairment and RM4.60 million of impairment loss on trade receivables. Adjusting for the consolidation of ISS and impairment of goodwill, Formis would have performed better with an operating profit of RM14.72 million and a pre-tax profit of RM13.99 million.

Despite the operating losses, Formis still has a healthy balance sheet and a strong liquidity profile. The Group’s debt level eased from RM90.06 million as at end-March 2010 to RM76.23 million as at end-March 2011. Correspondingly, its gearing ratio improved to 0.37 times while retaining its net-cash position. Elsewhere, its liquidity position is supported by its large cash balances of approximately RM80 million as at the same date.

Looking ahead, Formis’ gearing ratio is expected to hover around 0.5 times. “In addition to its RM16.8 million acquisition cost for a 20.6%-stake in Ho Hup, the Group is also anticipated to invest RM21 million to subscribe for Ho Hup’s rights issue. The latter is part of Ho Hup’s restructuring plan,” opines Kevin Lim, RAM Ratings’ Head of Consumer and Industrial Ratings. “Given Formis’ intention of maintaining a minimum 20% post-dilution equity in Ho Hup, the Group’s gearing ratio may weaken further if it incurs more debt to increase its stake in Ho Hup,” adds Kevin.

Meanwhile, Formis’ ratings continue to be supported by its established reputation after having been in the Malaysian ICT industry for more than 2 decades, with niches in the government, telecommunications and financial services sectors. However, the Group’s ratings are moderated by its inherent need to secure new contracts to replenish its order book and sustain its growth amid the competitive ICT industry.
The ratings could face downward pressure if Formis’ business and/or financial profiles deteriorate further, i.e. the Group continues to be in the red. On the other hand, the rating outlook may be revised to stable if Formis is able to improve its operating performance by sustaining or augmenting its order book and stemming ISS’ losses.

Media contact
Low Li May
(603) 7628 1175
limay@ram.com.my