MARC AFFIRMS ITS AAA(bg) RATING ON BOUSTEAD HOLDINGS BERHAD'S RM1.0 BILLION BANK GUARANTEED MTN PROGRAMME

Apr 10, 2012 -

MARC has affirmed its rating on Boustead Holdings Berhad’s (Boustead Holdings) RM1.0 billion Bank Guaranteed Medium Term Notes (BG MTN) programme at AAA(bg) with a stable outlook. The rating reflects the credit strength of the syndicated bank guarantee facility provided by OCBC Bank (Malaysia) Berhad (OCBC Malaysia), Public Bank Berhad (Public Bank), Malayan Banking Berhad and The Bank of East Asia (BEA) Labuan Branch. MARC maintains financial institution ratings on all four banks of AAA/Stable, of which the ratings on OCBC Malaysia and Public Bank are based on public information. Any subsequent rating actions on the rated programme will reflect a 'weak link' approach to credit enhancement; the rating on the BG MTN programme cannot be higher than that of the lowest rated supporting financial institution. The rating action affects RM840.0 million of BG MTN outstanding under the rated programme.

Boustead Holdings is a holding company which owns a diverse portfolio of subsidiaries and associates engaged in plantation, property, pharmaceutical, trading & manufacturing, heavy industries and finance & investment businesses. Following MARC’s initial rating on the BG MTN programme, the 61.4%-owned subsidiary of the Malaysian Armed Forces Fund Board, Lembaga Tabung Angkatan Tentera (LTAT) completed two major acquisitions during 2011. The holding company had initially acquired up to 97.8% Pharmaniaga Berhad (Pharmaniaga), a company which holds a ten-year concession with the Ministry of Health (MOH) for the supply and distribution of approved drugs and medical products to government hospitals and clinics, but is in the process of reducing its stake to comply with Bursa Malaysia’s 25% public spread requirement for listed companies. It also completed its acquisition of a 51% interest in helicopter services provider MHS Aviation Berhad which mainly services the oil and gas industry.

Boustead Holdings' consolidated results for the financial year ended December 31, 2011 (FY2011) improved with revenue increasing 38.4% to RM8,555.8 million (FY2010: RM6,181.8 million) and pre-tax profit growing 14.4% to RM831.0 million (FY2010: RM726.2 million). The improved financial performance was underpinned by the maiden contribution from Pharmaniaga and growth across nearly all its business divisions, which compensated for the weaker-than-expected performance of the heavy industries division due to cost escalations on certain commercial shipbuilding projects. Comparing the group’s operating cash flow (CFO) to the year before, MARC notes that CFO generation was restored in FY2011 to RM903.0 million (FY2010: RM173.4 million; FY2009: RM604.9 million), however, the group’s capital expenditure and cash outlays on the construction of investment properties continued to weigh on its free cash flow generation. The group remained free cash flow negative in FY2011, although the deficit was notably smaller at RM241.4 million compared to RM521.1 million the year before. The acquisitions and capital spending have led to increased debt levels, as evidenced by the increase in Boustead Holdings’ consolidated debt-to-equity ratio to 0.98x (FY2010: 0.67x). MARC expects capital spending to moderate somewhat in FY2012, which, coupled with an adequate consolidated operating performance over the next several quarters, should aid the strengthening of its cash flow protection metrics.

Since the initial rating, holding company level credit metrics have weakened somewhat. MARC notes that cash outlays for the holding company’s investments in FY2011 were funded by additional borrowings, of which 59.8% were short-term borrowings. This caused the holding company’s debt-to-equity ratio to almost double to 0.91 times (x) (FY2010: 0.47x) and its finance costs to increase significantly. MARC opines that further drawdowns under the rated programme and additional borrowings could translate to increased pressure on operating subsidiaries to upstream dividends to meet the holding company’s debt servicing obligations. Further, the rating agency believes that Boustead Holdings’ reliance on short-term borrowings to finance investments of longer gestation periods could expose the holding company to higher liquidity and refinancing risks, although this is somewhat mitigated by its continued good access to bank loans and the domestic capital market. In FY2011, cash dividends received from its subsidiaries and associate companies totalled RM255.9 million compared to RM264.0 million in the previous financial year. However, the holding company paid out dividends of RM302.6 million (FY2010: RM337.7 million) and interest on borrowings of RM102.1 million (FY2010: RM63.4 million), which in the rating agency’s opinion continues to reflect an aggressive dividend policy. MARC believes that a sustained improvement in the overall dividend generation capacity of Boustead Holdings’ subsidiaries, acquisition discipline and a prudent dividend policy will be fundamental to strengthening the holding company’s cash flow protection measures.

Noteholders are insulated from the downside risks in relation to Boustead Holdings’ credit profile by virtue of the irrevocable and unconditional bank guarantee provided by the consortium of banks. Any changes in the supported rating or rating outlook will be primarily driven by changes in the consortium of banks’ credit rating/outlook.

Contacts:
Se Tho Mun Yi, +603-2082 2263/ munyi@marc.com.my;
Sabesh Parameswaran, +603-2082 2260/ sabesh@marc.com.my;
Francis Xaviour Joe, +603-2082 2279/ fxjoe@marc.com.my.