RAM Ratings reaffirms ratings of Poh Kong’s Islamic debt issue

Published on 26 December 2012

RAM Ratings has reaffirmed the respective long- and short-term ratings of Poh Kong Holdings Berhad’s (“Poh Kong” or “the Group”) RM150 million Danajamin-Guaranteed Islamic Commercial Papers/Islamic Medium-Term Notes Programme (2011/2018) (“ICP/IMTN”) at AAA(fg) and P1. The long-term rating carries a stable outlook. The AAA(fg) rating of the ICP/IMTN reflects the unconditional and irrevocable guarantee extended by Danajamin Nasional Berhad (“Danajamin”, rated AAA/Stable/P1), which enhances the credit profile of the debt issue beyond the Group’s stand-alone credit strength.

The P1 rating and Poh Kong’s stand-alone credit profile are supported by the Group’s established reputation and market position as Malaysia’s largest jewellery retail chain. As at end-July 2012, Poh Kong had 101 retail outlets in the country. Its favourable cashflow protection metrics and manageable balance sheet continue to support its credit standing. The Group’s liquidity profile is considered strong, enhanced by its gold inventory, which can be liquidated to meet its financial obligations if required.

Poh Kong’s credit profile is moderated by its vulnerability to volatile gold prices. While the retail mark-up on yellow gold, to some extent, buffers against price volatility, the Group’s profitability remains susceptible to the risk of sharp declines in the price of gold. Its working capital requirement is also hefty, amid its long inventory cycle and lofty gold prices. Poh Kong remains exposed to market competition vis-à-vis fast-changing industry trends and customer sensitivity to gold price movements. Nevertheless, demand for yellow gold is expected to remain resilient over the long term given its universally recognised value and Malaysians’ view of yellow gold jewellery as a customary gift on special occasions.

In tandem with the appreciation in the price of gold (+20.6%) and a higher sales volume from an enlarged network, Poh Kong’s top line rose 19.9% year-on-year to RM830.12 million in FYE 31 July 2012 (“FY Jul 2012”). Notwithstanding heftier operating expenses from an expanded network, higher gold prices widened the Group’s adjusted operating profit before depreciation, interest and tax margin to 13.10% (FY July 2011: 12.85%). Nevertheless, greater debt assumption for its hefty working capital and network expansion needs had increased its total adjusted debt to RM247.57 million as at end-July 2012 (end-July 2011: RM195.44 million), resulting in a higher adjusted gearing ratio of 0.63 times (FY Jul 2011: 0.56 times). Poh Kong’s adjusted funds from operations debt cover, however, stayed stable at 0.36 times (FY Jul 2011: 0.38 times), given its improved showing during the year.

“Poh Kong’s plans to open between 5 and 8 outlets in FY July 2013 and its corresponding working capital needs amid an environment of lofty gold prices, are expected to entail further debt funding. This increase in debt level is expected to moderate the Group’s adjusted gearing ratio to 0.7 times, while contributions from an expanded network are envisaged to maintain its adjusted funds from operations debt cover at about 0.3 times,” notes Kevin Lim, RAM Ratings’ Head of Consumer and Industrial Ratings.  

Media contact

Juliana Koay

(603) 7628 1169

juliana@ram.com.my