MARC AFFIRMS SHORT-TERM AND UPGRADES LONG-TERM RATINGS ON BOON KOON GROUP BERHAD'S ISLAMIC DEBT PROGRAMME

MARC has affirmed the short-term and upgraded the long-term ratings of Boon Koon Group Bhd's (BKGB) RM100 million Islamic Commercial Papers/Islamic Medium Term Notes (ICP/IMTN) programme to MARC-3ID/BBBID from MARC-3ID/BBB-ID respectively. The rating outlook is stable. The rating action affects RM45 million of outstanding notes issued under the programme. The upgrade in the long-term rating reflects the improvement in the group's business and financial risk profile after restructuring efforts in 2009 and 2010 and improved business conditions in the domestic rebuilt commercial vehicle segment. Nonetheless, the group's high debt leverage and long cash conversion cycle continues to weigh on its financial risk. BKGB's short-term rating remains unchanged due to its sizeable upcoming debt maturities in 2012 and its modest free cash flow generation in the three months to June 30, 2011 (1QFY2012).

BKGB is an investment holding company listed on Bursa Malaysia. The group's principal activities include the manufacturing and distribution of rebuilt commercial vehicles and bodyworks; trading of commercial vehicle accessories, parts and components; and resale of value-added chassis cabs and equipment. The group is a pioneer and market leader in the domestic rebuilt commercial vehicle market. The group's head office and principal manufacturing plant are located in Nibong Tebal, Penang.

As market leading player in the domestic rebuilt commercial vehicles segment, the group has benefited from the consolidation of a fragmented industry to 18 players from 33 players previously. The industry consolidation was brought about by the introduction of the approved permit (AP) licensing system by regulatory authorities in early 2009. MARC notes that BKGB has improved its competitive standing as evidenced by the increasing share of approval APs gained by BKGB since the inception of the new system.

Since incurring substantial losses for the 15 months ended March 31, 2009, the group implemented a comprehensive restructuring of its business which involved shutting down loss-making entities, disposing non-core assets, and streamlining of operations. The group has achieved a reduction in costs; profit before tax improved from a modest RM0.1 million in FY2010 to RM2.6 million in FY2011 on the back of a marginal 3.0% growth in revenues. Consequently, operating profit margins recovered to 7.79% based on 1QFY2012 results, from 5.45% in FY2011. Cash flow from operations (CFO) for the year moderated to RM31.6 million (FY2010: RM41.5 million) as benefits from rationalisation efforts and lower taxes tapered off (net tax refund of RM4.2 million in FY2010 compared to net tax paid of RM0.7 million in FY2011). Gearing as measured by the debt-to-equity (DE) ratio has come down to 2.22 times (x) as at end 1QFY2012, compared to 3.08x in FY2009. The group has sufficient liquidity on hand to meet its upcoming bond repayment of RM10.0 million due in February 2012. Its final note maturities of RM35.0 million in December 2012 would be exposed to some measure of refinancing risk particularly as cash generation appears to be slowing. Recently, the group announced plans to sell a majority stake in its leasing business to Hitachi Capital Corporation for RM9.0 million, the proceeds of which would be mostly used to fund its repayment of the outstanding notes.

The stable rating outlook reflects MARC's expectation that the group will continue to manage its liquidity and refinancing needs in a proactive manner.

Contacts: Sabesh Parameswaran, +603-2082 2260/ sabesh@marc.com.my; Francis Xaviour Joe, +603-2082 2279/ fxjoe@marc.com.my.