MARC has affirmed the ratings of ABS Logistics Berhad's (ALB) Senior Sukuk Ijarah comprising RM100.0 million of Class A, RM20.0 million of Class B and RM40.0 million of Class C sukuk at AAAIS, AAIS and AAAIS(bg) respectively

MARC has affirmed the ratings of ABS Logistics Berhad's (ALB) Senior Sukuk Ijarah comprising RM100.0 million of Class A, RM20.0 million of Class B and RM40.0 million of Class C sukuk at AAAIS, AAIS and AAAIS(bg) respectively. The rating action affects the outstanding amounts under the respective classes of RM75.0 million, RM20.0 million and RM40.0 million. The outlook on the ratings for Class A and B sukuk has been revised to stable from negative. The outlook revision reflects reduced pressure on credit profile of the transaction's originator and lessee, Tiong Nam Logistics Holding Berhad (Tiong Nam) since MARC's last review. Whilst Tiong Nam's recent results indicate an improvement in profitability and cash flow generation, the logistics service provider's free cash flow generation remains negative and its high gearing and slim covenant headroom continue to constrain its credit profile.

The ratings of the Class A and Class B sukuk are underpinned by the stable performance of the collateral properties, satisfactory loan-to-value (LTV) ratios for the sukuk and robust debt service coverage levels. Meanwhile, the enhanced rating of the Class C sukuk benefits from an unconditional and irrevocable guarantee from Malayan Banking Berhad, on which MARC maintains a financial institution rating of AAA/stable. The ratings of Class A and Class B will be affected by credit deterioration on the part of the lessee, Tiong Nam given that Tiong Nam's credit risk cannot be de-linked from the transaction. Should actual net operating income generated by the collateral properties fall short of its ijarah servicing obligations under the sukuk, the transaction's performance would be dependent on Tiong Nam's ability to make up the shortfall.

The securitised properties which have a combined net lettable area of 1.1 million square feet (sq ft), are located strategically in established industrial areas across seven states in Peninsular Malaysia and supported by a stable tenant base. As at September 30, 2012, the occupancy rate of the securitised properties improved to 95.0% as compared to 93.7% as at March 2012. Although the leases of the securitised properties are short term, averaging three years, renewal risk is somewhat mitigated by a low tenant turnover rate. Most of the tenants have been with Tiong Nam for over ten years, however, some tenant concentration risk is seen with ten of the largest tenants account for more than 57.3% of the annual gross rental generated by securitised properties.

During the period under review (April 1, 2012 to September 30, 2012), the securitised properties generated net operating income (NOI) of RM14.8 million, slightly above the required ijarah payments of RM14.5 million. The LTV ratios for the Class A and Class B sukuk are 51.9% and 65.7% respectively based on MARC's valuation of RM144.5 million, derived from an assumed stabilised NOI of RM14.5 million at a capitalisation rate of 10%. The high LTV ratios are high for their respective rating bands, however, Class A's amortisation schedule is expected to facilitate a reduction in LTVs to 27.7% and 41.5% at the expected maturity date. The respective debt service coverage ratios (DSCR) of Class A and Class B sukuk for the period under review were 4.6 times and 4.1 times, above the minimum rating requirements of 2.2 times and 1.9 times.

Tiong Nam posted an operating profit of RM14.7 million in 1HFY2013 compared to negative RM0.1 million in the previous corresponding period. The turnaround in its performance was supported by the higher rental income (1HFY2013: RM8.0 million; 1HFY2012: RM3.8 million) and occupancy rates in the warehouse segment as well as some margin recovery in the transportation segment. In line with the better profitability, Tiong Nam achieved RM14.7 million in cash flow from operation (1HFY2012: negative RM3.3 million). Nonetheless, MARC notes that the group has been investing heavily in the property letting and warehousing segments and land acquisitions, resulting in negative free cash flow of RM2.4 million in 1HFY2013. The company's expansion plans were mainly funded by borrowings with its total debt increasing to RM305.6 million during 1HFY2013 (1HFY2012: RM223.7 million). Consequently, its debt-to-equity ratio rose to 1.06 times (1HFY2012: 0.8 times), edging closer to the gearing ratio limit of 1.2 times allowed under the terms of the Sukuk Ijarah Programme.

Negative pressure on the ratings of Class A and Class B sukuk could derive from deterioration in the performance of the collateral properties or Tiong Nam's credit profile.

Contacts: Ng Chun Kean, +603-2082 2230/ chunkean@marc.com.my; Jason Kok, +603-2082 2258/ jason@marc.com.my; David Lee, +603-2082 2255/ david@marc.com.my.

February 26, 2013