MARC AFFIRMS ITS B-ID RATING ON TALAM TRANSFORM BERHAD’S SETTLEMENT BaIDs

MARC has affirmed its rating on Talam Transform Berhad’s (Talam) outstanding RM52.1 million Settlement Bithaman Ajil Debt Securities (Settlement BaIDs) at B-_ID with a stable outlook. The rating reflects the group’s weak financial position, its limited business prospects as well as its continued reliance on timely asset disposals to meet its substantial financial obligations.

Talam’s cash flow generation remains constrained by its inability to develop its own property projects as it has still not been able to obtain the requisite advertising permit and developers' licence (APDL). In addition, its ability to regain prospective buyers' confidence would also remain a challenge amid the current property market slowdown. As at May 31, 2016, Talam's land bank stood at 1,185.8 acres which the group has valued at an estimated RM921.1 million, of which 83.6% is unencumbered. Talam would need to rely on land disposals to generate cash flows, although land parcel sales were flat at RM142.5 million in the financial year ended January 31, 2016 (FY2016) (FY2015: RM 143.8 million). MARC opines that Talam could face challenges in further disposals of its land parcels owing to their less prime locations.

Notwithstanding the foregoing, Talam has pending asset sales of RM256.1 million as at end-June 2016, from which it expects to receive net cash proceeds of RM19.5 million by end-2016 and RM80.8 million beyond 2016. However, there remains a risk that these transactions may not be consummated. MARC notes that since the last review, two of Talam’s asset sales had been terminated: its 85.0% stake in Jilin Province Maxcourt Hotel Limited for RMB230.0 million (about RM140.9 million) and the sale of 145.1 acres of land in Bestari Jaya, Selangor, for RM23.2 million. During FY2016, Talam disposed five subsidiaries largely to reduce its liabilities. Apart from one subsidiary, which was sold for a cash consideration of RM1.5 million, the other subsidiaries were sold at RM1 each with acquirers absorbing the net liabilities. The disposals resulted in a net reduction in liabilities of RM281.2 million in FY2016.

In FY2016, Talam’s revenue declined 23.9% y-o-y to RM155.6 million but registered a turnaround in profit before tax to RM19.4 million from losses of RM97.9 million in FY2015. The pre-tax profit in FY2016 was driven mainly by gains on disposal of subsidiaries of RM282.7 million which were offset by impairment losses on land of RM255.1 million. As the disposal yielded an insignificant amount of cash, cash flow from operations (CFO) was lower at RM71.9 million (FY2015: RM160.0 million). Talam's debt-to-equity ratio declined to 0.46 times attributed to the sale of subsidiaries (FY2015: 0.56 times).

For 1HFY2017 (unaudited), Talam recorded a decline in revenue of 42.6% y-o-y to RM69.3 million and a loss before tax of RM20.2 million. Talam’s trade and other payables (inclusive of tax liabilities) remain large in relation to its cash generation, standing at RM430.0 million as at end-1H2017. The group’s cash and bank balances stood at RM9.5 million which together with expected cash proceeds from asset sales will be sufficient to meet its next profit payment of RM1.6 million due on December 29, 2016.

MARC may downgrade the rating if Talam experiences further setbacks in its asset sales. In light of continued uncertainties on asset disposals, MARC considers Talam’s outstanding Settlement BaIDs to remain vulnerable to non-payment risk.

Contacts: Wan Abdul Muiz Wan Abdul Ghafar, +603-2082 2260/ muiz@marc.com.my; Yap Lai Ken, +603-2082 2247, laiken@marc.com.my.

October 11, 2016