RAM Ratings upgrades ratings of DFZ Capital Berhad’s debt issue

Published on 31 July 2012

RAM Ratings has upgraded the respective long- and short-term ratings of DFZ Capital Berhad’s (“DFZ” or “the Group”) RM60 million Commercial Papers/Medium-Term Notes Programme (2007/2014) to A1 and P1, from A2 and P2. Concurrently, the long-term rating of DFZ’s RM60 million Medium-Term Notes Programme (2007/2017) has also been upgraded from A1 to A2. The long-term ratings carry a stable outlook. DFZ is an investment holding company with subsidiaries involved mainly in the wholesale, distribution and retail of duty-free merchandise, property management as well as hospitality services.

The rating upgrade reflects DFZ’s sturdier credit profile, underpinned by the commendable improvement in its financial performance. Driven by its entrenched duty-free operations, the Group’s operating profit before depreciation, interest and tax (“OPBDIT”) expanded at a compounded annual growth rate of 30% over the last 5 years. This, coupled with a 19% reduction in debt levels y-o-y, more than doubled DFZ’s adjusted funds from operations (“FFO”) debt coverage from 0.33 times in FYE 28 February 2007 (“FY Feb 2007”), to 0.87 times in FY Feb 2012. Going forward, DFZ’s adjusted FFO debt coverage is envisaged to exceed 1 time as the Group continues to pare down its borrowings with sturdy cashflows from its resilient duty-free business. Meanwhile, previous rating constraints from the less robust credit profile of DFZ’s parent company – Atlan Holdings Bhd (“Atlan”) – are alleviated by the latter’s improved financial standing. Atlan’s adjusted gearing ratio halved from 0.9 times to 0.47 times y-o-y amid the 40% reduction in total borrowings, as well as, an enlarged equity based boosted by gains from the disposal of land and properties. On the back of a lower debt level, Atlan’s FFO debt coverage came in higher at 0.32 times in FY Feb 2012 (FY Feb 2011: 0.24 times). With the expected utilisation of partial proceeds from Atlan’s upcoming land and property sales to further pare down its debts, the company’s gearing is envisaged to ease to around 0.4 times, and FFO debt coverage increase to about 0.5 times.

On the back of more than 29 years of operating experience and 36 duty-free retail outlets, DFZ boasts an established operating track record and is the largest duty-free retail and wholesale company in Malaysia. It has established a firm foothold as the leading duty-free retailer and wholesaler along the Malaysia–Thai and Malaysia–Singapore borders. Given its size and established relationships with its suppliers, the Group benefits from economies of scale, as reflected in its broadening margins over the years. Meanwhile, the high entry barrier associated with the stringent issuance of duty-free licences, approvals from relevant authorities and restrictions on store locations prevent the influx of new competition.

Nevertheless, DFZ’s ratings remain moderated by the fact that duty-free operations are closely linked to government tax regimes; the Group is exposed to changes in tax policies on both sides of the border. It also faces a licence-non-renewal risk as most of DFZ’s duty-free outlet licences are subject to periodic renewal. Elsewhere, outlets located at tourist spots and entry points in the Malaysian peninsular are susceptible to the cyclical tourism industry, as traffic flow hinges on the health of the tourism sector. The Group’s border-down outlets, in particular, are vulnerable to localised event risk, as demonstrated last year when political unrest and prolonged flooding in Thailand constrained operations at these outlets.

Media contact

Evelyn Khoo

(603) 7628 1075

evelyn@ram.com.my