RAM Ratings reaffirms Aspion’s AAA(bg)/P1(bg) sukuk ratings

Published on 18 November 2013

RAM Ratings has reaffirmed the enhanced ratings of Aspion Sdn Bhd’s (Aspion or the Group) RM150 million Islamic Commercial Papers/Islamic Medium-Term Notes Programme (2012/2018) (the Sukuk) at AAA(bg)/Stable/P1(bg). The enhanced ratings reflect the unconditional and irrevocable guarantee extended by Maybank Islamic Berhad (rated AAA/Stable/P1), which enhances the credit profile of the Sukuk beyond Aspion’s stand-alone credit strength. The Group primarily manufactures and distributes surgical, dental and examination gloves.

Aspion’s stand-alone credit profile is underpinned by its position as a reputable surgical-glove producer. Relative to examination gloves which are more commoditised, the specialised application of surgical gloves heightens the entry barriers of this segment as more stringent regulations apply. Demand for medical gloves is viewed as resilient, supported by their essential function as a protective barrier within the healthcare sector. The Group’s satisfactory financial profile also continues to support its credit standing.

Aspion’s top line inched up and its profitability improved amid softer natural latex prices in FY Oct 2012. Its operating profit before depreciation, interest & tax (OPBDIT) margin increased to 10.80% from 7.94% for FY Oct 2011. Natural latex prices continued to soften in the first 7 months of FY Oct 2013, contributing to a higher OPBDIT margin of 13.20%. The Group’s cashflow protection metrics had also improved. Aspion’s funds from operations debt coverage (FFODC) ratio was 0.26 times in 7M FY Oct 2013, up from 0.19 times in FY Oct 2011, given its better profit performance amid lower raw material prices. The Group’s increased debt load was cushioned by its enlarged equity, resulting in a gearing ratio of 0.87 times as at end-May 2013, unchanged from end-FY Oct 2011.

“Aspion’s gearing ratio is expected to hover around 1–1.2 times as the Group seeks to fund its near-term growth plans through debt and internally-generated cashflow,” notes Kevin Lim, RAM’s Head of Consumer and Industrial Ratings. “Meanwhile, contributions from its expanded operations are envisaged to support the Group’s FFODC ratio at around 0.2 times,” adds Lim.   

We view Aspion’s planned RM170 million capacity expansion to build a new surgical-glove plant in Kulim as aggressive. The expansion is forecasted to more than triple the Group’s surgical gloves capacity to approximately 2.5 billion pieces by end-FY Oct 2017. We view the projected increased production as optimistic, as Aspion may experience challenges in strengthening the Group’s distribution network to tap into new markets and increase its market share.

We note that Southern Capital Group (Southern Capital), Aspion’s controlling shareholder, is a private equity sponsor. Typically, private equity investors have a shorter investment time frame and can initiate major changes at the companies they acquire. Hence, we do not discount the possibility of further expansion plans or additional leveraging, which may exert greater strain on the Group’s financial profile. Aspion’s financial profile may also be pressured if its receivables profile continues to worsen if the southern European economies, where many of its aged-receivables clients are located, remain mired in recession. 

Elsewhere, Aspion’s credit profile is moderated by its vulnerability to fluctuating input prices and volatile forex movements. Aggressive expansion of production capacity by Aspion and its peers is expected to intensify competition within the already-competitive glove market, thereby increasing pressure on the Group’s profitability.

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Carol Pang

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carol@ram.com.my