RAM Ratings reaffirms Guinness Anchor Berhad’s ratings

Published on 13 November 2014

RAM Ratings has taken the following rating actions in respect of Guinness Anchor Berhad’s (GAB or the Group) corporate credit ratings:

Rating Type	Rating Action	Ratings
ASEAN Ratings	Reaffirmed	seaAAA/Stable/seaP1
Global Ratings	Reaffirmed	gA2/Stable/gP1

Concurrently, we have reaffirmed the AAA/Stable/P1 ratings of GAB’s RM500 million Commercial Papers/Medium-Term Notes Programme (2011/2018). GAB is primarily involved in the brewing, marketing and distribution of malt liquor.

Throughout the year under review, the malt liquor market (MLM) was broadly affected by 2 stinging factors – an increase in contraband product availability in Peninsular Malaysia (49% y-o-y increase in 2013, according to a private study by Deloitte Consulting) and an overall softer consumer sentiment on the back of the government’s subsidy rationalisation programme. Amidst these pressures, GAB’s performance was hard hit in fiscal 2014 after 12 consecutive years of growth. Despite its sales volume tumbling 6.6%, a 6.5%-8.5% increase in the prices of the Group’s products moderated revenue by only 3.9% to RM1.61 billion in FY Jun 2014. Meanwhile, reduced sales coupled with an increase in excise duty (of around 3%) via a re-evaluation of excise duty tax calculation by the Royal Malaysian Customs led to a 4.6% drop in operating profit before depreciation, interest and tax.

Regardless, GAB continues to head the domestic MLM, with a 57.4%-share based on sales for the year ended FY Jun 2014. The Group’s commanding market position, supported by a strong distribution network, gives it an edge when it comes to maintaining and ensuring product visibility and availability. In the medium term, we envisage GAB retaining its leadership position, supported by its strong brand equity, continuous marketing efforts and extensive distribution network.

Despite the weaker sales, the Group’s funds from operations (FFO) and operating cashflow (OCF) generation ability remain robust. Excluding a one-off write-back of overpaid tax, the Group generated FFO of RM237.15 million and an OCF of RM221.61 million in FY Jun 2014 (FY Jun 2013: RM244.86 million and RM232.63 million). This translated into superior FFO and OCF debt cover ratios of 1.58 and 1.48 times, respectively. “Going forward, we expect GAB’s cashflow-protection metrics to remain impressive, with its FFO and OCF debt cover ratios maintained at above 1 time,” said Kevin Lim, RAM’s Head of Consumer and Industrial Ratings. The Group’s gearing ratio, meanwhile, remained largely unchanged at 0.42 times, in tandem with its stagnant debt levels. Its net gearing ratio, on the other hand, rose marginally from 0.22 to 0.25 times as a result of heavier working capital. Nevertheless, the Group’s balance sheet remains in line with our expectations and is envisaged to remain conservative.

The Group’s credit profile is, nonetheless, affected by several challenges in the local MLM. “While the industry has been spared tax hikes for the last 9 years, it remains vulnerable to potential future increases. However, we do note that no hike was announced under the recently tabled Budget 2015,” adds Lim. Besides the threat of illicit alcohol trade, GAB is vulnerable to fluctuating input costs and exposure to regulatory risk, given the sensitive nature of the alcohol industry in Malaysia, a Muslim-majority country.

Media contact
Sahil R Kamani
(603) 7628 1084
sahil@ram.com.my