RAM Ratings downgrades Formis’ ratings from BBB1/P2 to BB1/NP

Published on 01 August 2012

RAM Ratings has downgraded the respective long- and short-term ratings of Formis Resources Berhad’s (“Formis” or “the Group”) RM80 million Murabahah Underwritten Notes Issuance Facility/Islamic Medium-Term Notes Facility (2005/2012) (“MUNIF/IMTN”) from BBB¬1 and P2 to BB1 and NP. The negative outlook on the long-term rating has been maintained. Formis is an investment-holding company with subsidiaries involved in a diversified range of information, communication and technology (“ICT”) products and services.

The downgrade is premised on Formis’ weakened business fundamentals amid a challenging industry landscape, which has continued to depress its performance. Amid intense competition, the Group faces difficulty in securing new contracts to replenish its order book and sustain growth. Additionally, its persistent loss-making unit – Diversified Gateway Solutions Berhad (“DGSB”) – continues to weigh down its performance. Formis’ poorer profitability has resulted in weakened cashflow generation. Its funds from operations (“FFO”) debt coverage declined to 0.04 times (from 0.2 times 2 years ago), substantially below our expectations of 0.15 times.

“Moving forward, the Group still faces a difficult operating environment, which may continue to exert pressure on its ability to secure new contracts and hamper the recovery of its cashflow-protection metrics,” observes Kevin Lim, RAM Ratings’ Head of Consumer and Industrial Ratings. While Formis plans to market its proprietary legal software beyond Malaysian shores, we are mindful of bureaucratic challenges in dealing with government agencies and expect the performance of its software division to remain dismal in the near term. Meanwhile, we are cautious of the Group’s plans to expand DGSB’s solutions business. It remains to be seen if such plans will be successfully implemented and turn Formis around. Going forward, we expect the Group’s cashflow-protection measures to remain poor, with FFO debt coverage to stay below 0.1 times. Its exposure to the property segment – via Ho Hup Construction Company Bhd (“Ho Hup”) – could further weigh on its performance.

Considering Formis’ thinning cash balances, on top of its negative operating cashflow and the impending maturity of its MUNIF/IMTN, the Group’s liquidity position appears tight. Its cash balances of RM61.26 million as at end-March 2012 are insufficient to meet its short-term obligations of RM76.66 million (comprising mainly the MUNIF/IMTN amounting to RM34.55 million). RAM Ratings understands Formis plans to refinance the MUNIF/IMTN; we note, however, that it is still in early-stage negotiations with a bank. We highlight that the Group’s ability to repay its debts in the current year is highly dependent on the success of its refinancing exercise.

Despite the said challenges, the ratings continue to factor in Formis’ relatively conservative balance sheet. Its gearing ratio as at end-March 2012 remains healthy, albeit higher at 0.47 times against 0.4 times 2 years ago. We also recognise the Group’s position as a fairly reputable ICT provider.

The negative outlook has been maintained to reflect our concerns on the Group’s near-term liquidity pressure. Formis’ balance sheet could weaken should it gear up to meet its funding needs for the subscription of Ho Hup’s proposed rights issue and a mandatory general offer for remaining shares of Microlink Solutions Berhad (“Microlink”). We further caution against potential risks and challenges in integrating the operations of Formis and Microlink. Formis’ ratings could be downgraded if it does not show significant progress in securing refinancing for its MUNIF/IMTN within the next few months and/or fails to demonstrate sustainable improvement in its operating performance. The ratings also face downward pressure should the Group’s balance sheet deteriorate further. However, the rating outlook may be reverted to stable should Formis be able to substantially address our said concerns.

Media contact
Lee Chai Len
(603) 7628 1192
Chailen@ram.com.my