RAM Ratings revises outlook on Naim’s Islamic securities to negative; ratings unchanged

Published on 13 April 2012

RAM Ratings has revised the outlook on the long-term rating of Naim Holdings Berhad’s (“Naim” or “the Group”) RM500 million Islamic Medium-Term Notes Programme (2010/2025) (“IMTN”), from stable to negative. However, the respective long- and short-term ratings of AA3 and P1 for the IMTN and RM100 million Islamic Commercial Papers Programme (2010/2017) (collectively, “the Islamic Securities”) remain unchanged.

Naim is a property-development and construction group based in Sarawak. It also holds a 34%-stake in Dayang Enterprise Holdings Berhad, a listed provider of oil and gas support services. The revised outlook is premised on Naim’s weakened financial profile as a result of the slow progress of its contracts in hand, absence of notable new contracts, deferred property launches and delayed project implementation. Moving forward, the Group’s credit profile is likely to be constrained by its slower construction division and plans for hefty debt-funded capital expenditure. The Group is also facing keener competition within the construction sector, resulting in thinner margins. While we believe Naim still stands a good chance of clinching new jobs under various economic initiatives, including the Sarawak Corridor of Renewable Energy, the timing of their implementation is uncertain.

The Group’s weak showing since 1Q FY Dec 2011 resulted in a 33.1% year-on-year (“y-o-y”) plunge in its top line to RM409.65 million for the full year (FY Dec 2010: RM612.69 million); its construction division suffered operating losses since 3Q. This deviates substantially from our initial expectations. We note that Naim’s construction division had realised lower contract billings following delays caused by land issues, bleak weather and design changes. The division also did not manage to secure any notable new contracts last year. At the same time, the property division’s progress billings had declined due to delayed launches of new projects. The Group’s dwindling top line and fixed overheads as well as heftier interest costs led to an operating loss before tax of RM4.31 million in fiscal 2011 (FY Dec 2010: RM96.89 million profit).

Naim could deliver a better showing this year if its projects progress as scheduled. This is based on the management’s timeline for its RM685.4 million order book (as at end-December 2011), higher unbilled sales from properties launched in 2H 2011 and the accelerated development of its property projects. Even based on this pipeline, however, it is still likely to come below our earlier projections. The recovery of Naim’s financials hinges on its ability to replenish its order book. Although the Group seeks to secure about 8% of the RM6 billion of projects tendered, the uncertain timing of contract awards and/or implementation may dampen its replenishment efforts.

Moving forward, Naim plans to incur hefty debt-funded capital expenditure to acquire land and investment properties; its gearing ratio could exceed 0.6 times while its operating profit before depreciation, interest and tax debt coverage may sink below 0.15 times over the next 3 years. These ratios are weak for the rating. As at end-December 2011, Naim’s debt load had swelled to RM347 million (end-December 2010: RM125.11 million), with corresponding gearing and net gearings of 0.45 and 0.17 times, respectively (end-December 2010: 0.17 and 0.12 times).

Naim’s ratings may face downward pressure if its recovery is slower than anticipated and/or its financial metrics weaken beyond the acceptable level for the ratings. Alternatively, the rating outlook may be reverted to stable if the Group is able to replenish its order book, sustain the uptrend in its unbilled sales and demonstrate robust improvement in its business and financial profiles. RAM Ratings will be conducting our annual review of the Islamic Securities within the next 3 months.

Media contact
Ben Inn
(603) 7628 1024
ben@ram.com.my