RAM Ratings reaffirms P1(bg) rating of Ipmuda's debt facility

Published on 15 August 2011

RAM Ratings has reaffirmed the P1(bg) rating of Ipmuda Berhad’s (Ipmuda or the Group) RM30 million Bank-Guaranteed Commercial Papers Programme (2007/2012). The rating reflects the unconditional and irrevocable guarantee extended by RHB Bank Berhad, which enhances the credit profile of the debt issue beyond Ipmuda’s inherent or stand-alone credit standing.  



Ipmuda principally trades in building materials such as steel and cement. The Group is also involved in fluid engineering systems, the contracting and assembly of industrial control instruments, the manufacture and supply of kitchen cabinets and wardrobes, as well as property development. 

Ipmuda has a wide distribution network and enjoys good relationships with its suppliers, mostly local cement and steel players to ensure a steady supply of stocks. However, the Group’s stand-alone credit profile is moderated by the competitive domestic building-material trading industry and the inherent cyclicality of the construction and steel industries. Furthermore, the Group is also vulnerable to fluctuations in the prices of building materials, especially steel. Ipmuda’s historically volatile earnings and razor-thin operating margins reflect these challenges.

Ipmuda’s turnover slipped 6.6% year-on-year in FYE 31 December 2010 (FY Dec 2010), depressed by lower sales of steel bars and subdued exports of steel billets. A sales mix which was skewed towards lower-yield items had resulted in a narrower operating profit before depreciation, interest and tax margin of 0.65% (FY Dec 2009: 1.83%). A result of its overall weaker performance, Ipmuda’s cashflow protection measures deteriorated from a moderate funds from operations debt coverage (FFODC) ratio of 0.20 times as at end-FY Dec 2009 to 0.02 times as at end-FY Dec 2010. Looking ahead, RAM Ratings is cautiously optimistic that the Group should perform more favourably, supported by the potential pick-up in demand for building materials underpinned by a series of positive developments under the Economic Transformation Programme and Tenth Malaysian Plan. However, this depends on the timing of the successful roll out of these sizeable projects.

Meanwhile, the Group’s balance sheet remains manageable with a gearing ratio of 0.48 times as at end-December 2010. Barring any significant ramp-up in borrowings, Ipmuda’s gearing ratio is expected to hover at around 0.6 times over the medium term. Going forward, the Group plans to revive its stalled property development project in Kota Kinabalu, Sabah. “Should the entire RM25 million of construction costs for this project be debt funded, Ipmuda’s gearing ratio could weaken to about 1 time. Against the higher debt level, the Group’s FFODC could deteriorate from its envisaged moderate level to less than 0.1 times,” notes Kevin Lim, RAM Ratings’ Head of Consumer and Industrial Ratings. “Furthermore, property development is not Ipmuda’s core business. We caution that managing this business could introduce additional operational risk to the Group.”

Media contact
Evelyn Khoo
(603) 7628 1075
evelyn@ram.com.my