RAM Ratings reaffirms A1/P1 ratings of DFZ's debt issues

Published on 26 July 2013

RAM Ratings has reaffirmed 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) at A1 and P1, as well as the A1 rating of its RM60 million Medium-Term Notes Programme (2007/2017). The stable outlook on the long-term ratings has been maintained.
DFZ’s ratings are supported by its leading position in the Malaysian duty-free market and its virtual monopoly on border-town duty-free sales. Given its size and established relationships with suppliers, the Group also benefits from economies of scale. Additionally, DFZ operates in an industry in which the barriers to entry are high, i.e. vis-à-vis duty-free licences, requisite approvals from authorities and restrictions on store locations. This limits the influx of new competition, giving the Group a competitive advantage as an established incumbent with extensive coverage in strategic locations.
The Group’s fairly resilient duty-free business contributes significantly to its steady financial profile. DFZ’s top line grew 6.2% to RM598.14 million in FY Feb 2013, on the back of the improved showing of its border-town outlets which were previously impacted by the floods in Thailand. Its adjusted OPBDIT margin widened to 18.34% (FY Feb 2012: 17.24%) due to a more favourable sales mix of higher-value items and greater incentive discounts derived from bulk purchases. These contributed to increased funds from operations of RM81.49 million (FY Feb 2012: RM72.06 million), strengthening the Group’s adjusted funds from operations debt coverage ratio (“FFODC”) to 0.98 times in FY Feb 2013 (FY Feb 2012: 0.87 times). Meanwhile, DFZ’s adjusted gearing ratio eased from 0.44 times to 0.42 times as at end-February 2013 on an enlarged equity base.
Looking ahead, DFZ is expected to continue to be supported by the strong cashflow generation of its resilient duty-free operations, notwithstanding the disposal of its assets and lease interest in ZON Johor Bharu (“JB ZON”) to Pesaka Ikhlas Sdn Bhd in March 2013 and the subsequent cessation of the Group’s property and hospitality business in the area. DFZ’s duty-free business contributed about 90% of its revenue and operating profit before depreciation interest and tax in FY Feb 2013. Adjusting for the Group’s 25-year operating lease commitments in JB ZON, its adjusted gearing ratio and adjusted FFODC ratio are envisaged to hover at about 0.65 times and 0.45 times, respectively, albeit still commendable.
That said, 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 licence non-renewal risk as most of its duty-free outlet licences are subject to periodic renewal. Elsewhere, outlets located at tourist spots and airports in the Malaysian peninsular are susceptible to the cyclical tourism industry, as traffic flow hinges on the health of the industry. While the Group’s border-down outlets are somewhat more resilient against fluctuations in the industry, they remain vulnerable to localised event risk, as demonstrated last year when political unrest and prolonged flooding in Thailand constrained operations at these outlets.
Media contact
Juliana Koay
(603) 7628 1169
juliana@ram.com.my