RAM Ratings reaffirms Poh Kong’s issue ratings

Published on 18 November 2013

RAM Ratings has reaffirmed the AAA(fg)/Stable/P1 ratings of Poh Kong Holdings Berhad’s (Poh Kong or the Group) RM150 million Danajamin-Guaranteed Islamic CP/Islamic MTN (2011/2018) (ICP/IMTN). The enhanced AAA(fg) long-term rating reflects the irrevocable and unconditional financial guarantee from Danajamin Nasional Berhad (rated AAA/Stable/P1 by RAM), which enhances the credit standing of the ICP/IMTN beyond the Group’s stand-alone credit profile.

Poh Kong’s stand-alone credit profile reflects the Group’s established reputation and strong market position as Malaysia’s largest retail jewellery chain. The Group’s adequate cashflow-protection metrics and manageable balance sheet continue to support its credit standing. While we are cognisant of Poh Kong’s operational needs, the Group’s liquidity position is enhanced by its gold inventory – a portion of which can be liquidated in support of its financial needs, if required.

Poh Kong has a significant presence in the Malaysian jewellery industry, with 105 retail outlets as at end-July 2013. The Group achieved a record sales volume for gold products in FY July 2013, spurred by the steep drop in gold prices in 2H FY July 2013, to levels last seen in February 2011. On the other hand, the sharp decline in selling prices slashed the Group’s adjusted margin on operating profit before depreciation, interest and tax to 8.24% (FY July 2012: 13.10%), with some products being sold at almost break-even prices. The weaker operating performance and higher debt level had crimped Poh Kong’s adjusted funds from operations debt coverage (FFODC) to 0.22 times y-o-y (FY July 2012: 0.36 times). In addition, borrowings taken on for the opening of 7 new retail outlets and the purchase of a property for storage purposes had pushed the Group’s adjusted gearing ratio up from 0.63 to 0.67 times. However, Poh Kong’s net gearing ratio remained unchanged at 0.58 times, thanks to its healthier cash pile.

“With gold prices stabilising and the bulk of Poh Kong’s gold inventory now more aligned to the prevailing market prices, we expect a recovery in the Group’s earnings. This, together with sales contributions from Poh Kong’s enlarged network of outlets, is envisaged to lift its adjusted FFODC to about 0.25-0.30 times in the medium term,” notes Kevin Lim, RAM’s Head of Consumer and Industrial Ratings. The assumption of further debt to fund the opening of 6 outlets in FY July 2014 and the corresponding working-capital needs are expected to keep its adjusted gearing ratio at about 0.7 times.

On the whole, Poh Kong’s credit profile is moderated by its vulnerability to volatile gold prices. As observed in FY July 2013, the Group’s earnings are highly sensitive to sharp declines in the price of gold, despite the retail mark-up on yellow gold that has, to some extent, cushioned its profit performance amid volatile gold prices. In addition, Poh Kong requires hefty working capital for its lengthy inventory cycle and to build up the requisite inventory for its large, expanding retail network. Customers’ sensitivity to movements in gold prices within a competitive and trend-driven industry also moderates the Group’s credit profile. 

Media contact

Juliana Koay

(603) 7628 1169

juliana@ram.com.my