MARC AFFIRMS ITS MARC-2ID/AID RATINGS ON SYMPHONY HOUSE BERHAD’S RM100.0 MILLION ISLAMIC CP/MTN PROGRAMME; REVISES OUTLOOK TO NEGATIVE

Apr 18, 2012 -

MARC has affirmed its ratings of MARC-2ID/AID on Symphony House Berhad's (Symphony) RM100.0 million Islamic Commercial Papers/MediumTerm Notes (Islamic CP/MTN) Programme and revised the outlook to negative from stable. The rating action affects RM20 million of outstanding IMTNs.

The outlook revision reflects the slower-than-expected pace of recovery in Symphony's operating performance and its financial metrics in 2011. Since MARC's last review, losses had widened considerably from the pre-tax loss of RM3.73 million reported for the nine months to September 30, 2010 (9MFY2010) to RM20.55 million for the full year of 2010. The rating agency had expected the group's earnings and cash flow generation to improve meaningfully against 9MFY2010, underpinned by a pick-up in business process outsourcing (BPO) activity as well as satisfactory renewal and account retention levels. However, for 9MFY2011, the group reported a modest pre-tax profit of RM1.76 million and an after-tax loss of RM0.72 million. Its net cash flow from operations (CFO) of RM2.21 million was lower than that of the preceding two years. While recognising the non-recurring nature of some of the factors which caused the weaker performance in recent periods, MARC is concerned that the observed slower-than-expected pace of recovery will leave the group's credit metrics weakly positioned for an extended period of time.

The affirmed ratings, meanwhile, incorporate Symphony's fairly strong competitive positions in several BPO segments including cheque processing, contact management, human resource, and financial & accounting services, through its operating subsidiaries. The ratings also recognise the group's well-diversified customer base, while reflecting the smaller scale of its BPO operations relative to global outsourcing services providers, increasing competition in the domestic BPO industry and margin pressures.

The group's performance for 9MFY2011 was below MARC's expectations. Symphony recorded a pre-tax profit of RM1.76 million on revenue of RM139.74 million, against a pre-tax loss of RM3.73 million on revenue of RM126.09 million for 9MFY2010. Symphony BPO Solutions Sdn Bhd (SBPO) which accounts for over 70% of Symphony's consolidated revenue, recorded losses in 9MFY2011 in spite of posting higher revenue. The consolidated results were impacted by losses from the closure of SBPO's loss-making contact management business in Japan, the non-renewal of cheque processing service contracts and increasing operating costs. Symphony's human resources, and financial and accounting BPO segments, nonetheless, were able to maintain relatively stable margins. Consolidated cash flow coverage measures have also weakened significantly from historical levels, as evidenced by 9MFY2011's marginal CFO interest coverage ratio of 1.09 times and negligible CFO debt coverage. Cash and cash equivalents stood at RM27.1 million relative to total borrowings of RM44.2 million, which, together with the expectation that FY2012 CFO generation will improve against FY2011, somewhat moderates the refinancing risk with respect to outstanding notes. The notes programme expires in 2013.

The ratings could be lowered in the event that Symphony's credit metrics do not strengthen meaningfully relative to end-September 2011 levels. Alternatively, the outlook could revert to stable in the event that the group demonstrates substantial improvement in earnings and cash flow generation, allowing a marked strengthening of its financial metrics.

Contacts:
Ruben Khoo, +603-2082 2265 / rubenkhoo@marc.com.my;
Sandeep Bhattacharya, +603-2082 2247/ sandeep@marc.com.my.