MARC AFFIRMS ITS AAA(bg) AND AAA(fg) RATINGS ON PREMIER MERCHANDISE SDN BHD’S RM600 MILLION MTN PROGRAMME

MARC has affirmed its AAA_(bg) and AAA_(fg) ratings on investment holding company Premier Merchandise Sdn Bhd’s (Premier Merchandise) RM300 million seven-year bank-guaranteed Medium-Term Notes (MTN) Programme (Tranche 1) and RM300 million nine-year Danajamin-guaranteed MTN Programme (Tranche 2) respectively. The outlook for both ratings is maintained at stable. The affirmed rating on Tranche 1 reflects the rating on Malayan Banking Berhad (Maybank) which has provided an unconditional and irrevocable guarantee. The rating on Tranche 2 reflects the credit strength of an unconditional and irrevocable Kafalah Guarantee provided by Danajamin Nasional Berhad (Danajamin). MARC maintains a finance institution rating of AAA/stable on Maybank and insurer financial strength rating of AAA/stable on Danajamin.

The standalone credit profile of Premier Merchandise, which has indirect interests in 7-Eleven Malaysia Holdings Berhad (7-Eleven) and Singer (Malaysia) Sdn Bhd (Singer), has been strengthened by the proceeds from the initial public offering of 7-Eleven on the local bourse in May 2014. Premier Merchandise utilised part of the listing proceeds to early redeem RM400.0 million of the guaranteed MTNs in August 2014, reducing the outstanding notes to RM200.0 million each under Tranche 1 and Tranche 2. Following 7-Eleven’s listing, Premier Merchandise’s interest has been reduced to an indirect 57%, while its interest in Singer remains at an indirect 100%, both of which are held through Premier Merchandise’s wholly-owned subsidiary Berjaya Retail Berhad (BRetail).

  

MARC considers 7-Eleven and Singer’s entrenched market positions and longstanding operating track records in Malaysia’s highly competitive domestic retailing industry as key strengths. 7-Eleven is the largest convenience store operator in the country with 1,583 stores, while Singer is a major player in the direct selling of consumer durables segment with 689 branches nationwide. Singer also has a motorcycle hire-purchase business. However, 7-Eleven remains the largest contributor to the holding company’s financial performance, accounting for 79.3% and 77.13% of BRetail’s RM2.1 billion revenue and RM105.8 million operating profits for the financial year ended December 31, 2013 (FY2013). The company has increased its sales of higher-margin products which resulted in an improved operating profit margin of 4.9% in FY2013 (FY2012: 4.2%). 

Singer’s earnings normalised in FY2013 following higher dividends of RM234.4 million received from its subsidiary after it sold its investment in Cosway Corporation Limited in the previous year. Revenue and pre-tax profit were reported at RM429.5 million and RM43.7 million respectively (FY2012: RM450.6 million; RM41.1 million, excluding one-off gain). Singer’s earnings continue to be impacted by impairment losses on its hire-purchase financing for motorcycles business as well as on equal payment receivables for consumer durables. As a result, the company’s operating profit margin declined to 11.4% (FY2012: 12.9%) while no dividends were upstreamed.

As a non-operating investment holding company, Premier Merchandise relies on dividends from BRetail, which in turn is dependent on dividend flow from its operating subsidiaries. For FY2013, MARC observes that 7-Eleven upstreamed sizeable dividends of RM117.5 million to BRetail. Going forward, however, the quantum of dividends upstreamed could be tempered by the need to preserve cash to fund 7-Eleven’s expansion plans that involve opening 600 stores by 2016. BRetail’s other key operating indirect subsidiary, Berjaya Radioshack Sdn Bhd (Radioshack), which has 10 outlets in the Klang Valley and one new outlet in Penang, is seeking to strengthen its presence in the consumer electronics market.

For FY2013, BRetail’s leverage position has improved with borrowings declining to RM188.7 million following a net repayment of RM191.9 million during the year. Correspondingly, the group’s debt-to-equity (DE) ratio declined to 0.70x from 1.64x in the previous year. MARC observes that the group has further reduced its debt by about 8.1% to RM173.6 million in 1QFY2014, lowering the group’s DE ratio to 0.61x during the period. For FY2013, Premier Merchandise’s dividend income declined to RM21.5 million (FY2012: RM264.3 million) largely due to higher dividend upstreamed by BRetail in the previous year on the back of a one-off gain on disposal of its equity interest in Cosway Corporation Limited in FY2012. Following the full drawdown under the MTN programme coupled with a slight decline in shareholders’ funds, Premier Merchandise’s debt-to-equity (DE) ratio rose to 1.23x from 0.75x, but is expected to decline following the early redemption of RM400.0 million under the MTN programme in August 2014. The repayment is expected to reduce the company’s debt level to RM198.8 million in FY2014, resulting in a pro-forma DE of 0.41x. Premier Merchandise’s next note redemption of RM75.0 million will fall due in August 2015, although the company has the option to reissue under the rated programme.

Notwithstanding Premier Merchandise’s standalone risk factors, noteholders are insulated from the downside risk related to its credit profile by the guarantees provided by Maybank and Danajamin. Any change in the supported ratings or rating outlook would be primarily driven by changes in the credit strength of the guarantors.

Contacts: Jasmine Kua, +603-2082 2280/ jasmine@marc.com.my; Taufiq Kamal, +603-2082 2251/ taufiq@marc.com.my.

November 25, 2014