RAM reaffirms AAA(fg) rating of Mydin’s Islamic debt issue

Published on 29 January 2013

RAM Ratings has reaffirmed the enhanced long-term rating of AAA(fg) for Mydin Mohamed Holdings Bhd’s (“Mydin” or “the Group”) RM350 million Danajamin-Guaranteed Islamic Medium-Term Notes Programme (2011/2024) (“IMTN”), with a stable outlook.

The rating reflects the irrevocable and unconditional financial guarantee extended by Danajamin Nasional Berhad (rated AAA/Stable/P1 by RAM), which enhances the credit profile of the IMTN beyond Mydin’s stand-alone credit risk. The Group is principally involved in the operation of hypermarkets, emporiums, bazaars, mini markets and convenience stores, including the Kedai Rakyat 1 Malaysia (“KR1M”) in collaboration with the government.

Excluding the financial guarantee, Mydin’s stand-alone credit profile is underpinned by it being one of the largest locall¬¬¬y-owned grocery retailers. The Group has built an extensive presence throughout Peninsular Malaysia with 138 outlets as at end-June 2012. Mydin has a strong following within its target market of low- to middle-income customers and has established a niche position among the Muslim community by offering 100% halal products and a range of local items not typically carried by its foreign-owned competitors.

Nevertheless, the Group’s credit profile remains moderated by its exposure to stiff competition in the mass grocery retail sector. Apart from competing with large foreign-owned hypermarkets which are able to capitalise on the experience and network of their regionally/globally-established parents, Mydin has to contend with its local peers. “The operating environment for hypermarkets is envisaged to remain competitive as key players implement their expansion strategies in a tussle for market share,” says Kevin Lim, RAM Ratings’ Head of Consumer & Industrial Ratings. The Group’s aggressive expansion plans also entail considerable execution risk.

In fiscal 2012, Mydin’s revenue rose 14.4% y-o-y to RM1.94 billion, attributed to increased overall top line contributions from hypermarkets and mini markets. Apart from its new hypermarkets, additional earnings from KR1M stores also led to augmented annualised revenue for 1Q FY Mar 2013. Despite robust growth in revenue, the Group’s adjusted operating profit before depreciation, interest and tax margin was squeezed to 3.86% in FY Mar 2012 (FY Mar 2011: 4.85%), narrowing further to 2.43% in 1Q FY Mar 2013 due to the increased losses of its mini markets and convenience stores. Its thinner margin in 1Q FY Mar 2013 was exacerbated by the loss-making position of its 2 new hypermarkets, opened in 2Q 2012.

As a result of increased borrowings to fund the construction of new hypermarkets, Mydin’s total debt more than tripled from RM87.12 million as at end-FY 31 Mar 2011 to RM307.67 million as at end-1Q FY Mar 2013. Consequently, its gearing ratio rose from 0.22 times as at end-fiscal 2011 to 0.66 times as at end-1Q fiscal 2013. Along with its heavier debt load and weaker operating performance, the Group’s adjusted funds from operations debt coverage ratio plummeted from 0.90 times as at end-FY Mar 2011 to an annualised 0.15 times as at end-1Q FY Mar 2013. “We expect Mydin’s balance sheet to weaken further in the next 2 fiscal years, with its gearing ratio increasing to between 1.0 and 1.3 times as more debt is assumed for the construction of hypermarkets,” notes Lim.

Media contact

Evelyn Khoo

+603 7628 1075

evelyn@ram.com.my