RAM Ratings reaffirms Royal Selangor's rating, maintains negative outlook

Published on 13 February 2012
RAM Ratings has reaffirmed the A3 rating of Royal Selangor International Sdn Bhd’s (Royal Selangor or the Group) RM30 million Redeemable Unsecured Bonds (2001/2014) and maintained the negative outlook on the Group’s long-term rating. Royal Selangor and its subsidiaries are involved in the manufacturing and marketing of pewter, as well as marketing of jewellery products.

The rating is supported by Royal Selangor’s well-established brand, manageable balance sheet and moderate cashflow-protection measures. The ratings are, however, moderated by its susceptibility to cyclical economic change amidst a competitive and fragmented industry, its longer operating cash cycle days, continued losses in Selberan Jewellery Sdn Bhd and its exposure to volatile tin prices.

Royal Selangor’s overall operating performance improved in FYE 30 June 2011 (FY June 2011). The Group’s revenue grew 7.24% on the back of half-year contributions from its new Straits Quay tourist centre and its new flagship store at Pavilion which opened in the second half of the fiscal year as well as increased sales of higher-value items. Meanwhile, the Group’s profit margins also improved, aided by effective tin hedging policy and above-mentioned increased sales of higher-priced products. Despite the better operating performance, funds from operation debt cover (FFODC) slipped to 0.14 times (end-FY June 2010: 0.22 times) as more debt were assumed during the year amid its store expansion and corresponding increase in working capital needs. The higher debt levels lifted Royal Selangor’s gearing ratio to 0.73 times as at FY June 2011 (end-FY June 2010: 0.66 times) but is still within our expectations.

“Looking ahead, Royal Selangor’s gearing ratio is envisaged to stay manageable at below 0.8 times in the next 2 fiscal years, as its capital expenditure plans are estimated to be less hefty than those incurred in FY June 2011. Full-year contribution from the Group’s new outlets opened in 2H FY June 2011 as well as full-year effect of selling price increase implemented in April 2011 are expected to keep its FFODC at around 0.15 times in the near term. That said, the Group’s FFODC may dip below 0.15 times should Royal Selangor’s product demand be affected by the weaker economic environment,” explains Kevin Lim, RAM Ratings’ Head of Consumer and Industrial Ratings.

Meanwhile, the negative outlook is premised on fresh concerns over the softer economic conditions and the resultant impact on consumer and corporate spending on discretionary pewter giftware. The impact of higher tin price contracted on margins and the lengthening of operating cash cycle on higher working capital needs may also pose downside risk to Royal Selangor’s performance.

The rating may revert to stable if the Group is able to demonstrate resiliency amidst the challenging economic conditions as well as preserve its balance sheet strength and cashflow-protection measures. Conversely, the rating could be downgraded if Royal Selangor's business and financial profiles deteriorate.

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