RAM Ratings reaffirms AA3/P1 ratings of Naim’s Islamic debt issues with negative outlook

Published on 24 December 2012

RAM Ratings has reaffirmed the respective AA3 and P1 ratings of Naim Holdings Berhad’s (“Naim” or “the Group”) RM500 million Islamic Medium-Term Notes Programme (2010/2025) and RM100 million Islamic Commercial Papers Programme (2010/2017); the outlook on the long-term rating is maintained at negative. Naim is mainly 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.

On 13 April 2012, we revised the outlook on Naim’s long-term rating to negative from stable, based on its weakened financial profile as a result of the slow progress of contracts at hand, the absence of notable new contracts and deferred property launches. The Group’s top line and pre-tax profit for FYE December 2011 (“FY Dec 2011”) plunged 32.8% and 56.7% y-o-y, respectively. Coupled with a heavier debt load, Naim’s gearing as at end-December 2011 escalated to 0.45 times (end-December 2010: 0.17 times) while funds from operations (“FFO”) debt coverage for the year fell into deficit (FY Dec 2010: 0.71 times).

Since then, Naim has shown improvements in replenishing its order book and significant progress in property development. While its recovery is anticipated to gain momentum, the Group’s financial metrics for FY Dec 2012, particularly its FFO debt coverage, is expected to remain weak at below 0.2 times. Looking ahead, there are considerable uncertainties surrounding the pace of recovery which is dependent on the sustained sales of Naim’s properties and the award of new contracts. In the construction segment, the Group faces increasing competition which has resulted in slimmer margins. In addition, Naim plans to venture into large-scale mixed developments, expand its investment property portfolio and embark on land acquisitions which may entail more borrowings. We understand the Group is considering equity injection to ease debt requirements, however, this will be subject to market conditions. Meanwhile, we remain concerned over the significant change in Naim’s key management; failure to attain equilibrium could affect its overall business direction. As such, the negative outlook reflects RAM Ratings’ view that the Group still faces challenges in the near term to further improve its debt-protection measures. The long-term rating will face downward pressure if Naim’s financial metrics, especially its debt coverage levels, do not improve to levels commensurate with an AA-rating.

Meanwhile, the ratings continue to be supported by Naim’s strong track record in the timely delivery and execution of construction projects, secured largely from the government of Malaysia (“GoM”) and the Sarawak State government. We opine that its past performance positions it well to clinch new projects under various development initiatives undertaken by the GoM. Naim is also one of the largest and well-known property developers in Sarawak with a sizeable land bank. It currently has around 2,600 acres of land remaining, which is expected to sustain it for the next 8 years. The low holding costs of the Group’s land bank allow it to price its products competitively and defer launches in accordance with market conditions.

That said, Naim’s current businesses are still largely based in Sarawak, exposing it to geographical concentration risk. As such, any upside potential from its 2 main divisions is limited by the performance of the State’s property and construction markets. In addition, Naim remains a relatively small player among its similarly rated peers. The Group is also susceptible to risks associated with the inherently cyclical construction and property sectors, e.g. fluctuations in raw material prices, the country’s economic performance and keen competition.

Media contact

Ben Inn

(603) 7628 1024

ben@ram.com.my