RAM Ratings has reaffirmed the enhanced AAA(fg)/Stable rating of Mydin Mohamed Holdings Berhad’s (Mydin Holdings or the Group) RM350 million Danajamin-Guaranteed IMTN Programme (2011/2024). The rating reflects an irrevocable and

Published on 22 December 2016

RAM Ratings has reaffirmed the enhanced AAA(fg)/Stable rating of Mydin Mohamed Holdings Berhad’s (Mydin Holdings or the Group) RM350 million Danajamin-Guaranteed IMTN Programme (2011/2024). The rating reflects an irrevocable and unconditional financial guarantee extended by Danajamin Nasional Berhad (Danajamin; rated AAA/Stable/P1), which enhances the credit profile of the IMTN beyond the Group’s stand-alone credit strength.

Excluding the guarantee, Mydin Holdings’ stand-alone credit profile remains supported by its position as one of the largest locally owned grocery retailers. The Group has built an extensive presence, mainly in Peninsular Malaysia, with 298 outlets as at end-November 2016. It has also established a strong following among its targeted low to middle-income customers and carved a niche in the Muslim consumer segment by offering fully halal products and an array of goods manufactured by local players not typically carried by its foreign-owned competitors.

That said, Mydin Holdings’ credit profile also reflects risk management and internal control issues which have resulted in huge losses and a very weak financial profile. We further note that the Group’s small retail and premium outlets are still loss-making. Additionally, Mydin Holdings faces an increasingly competitive environment in the local mass grocery retail sector while its expansion plans expose it to execution and construction risks.

Notably, the Group’s inability to adjust prices following the implementation of the GST due to technical issues from a system migration exercise and anti-profiteering measures by the Government had led to a pre-tax loss of RM170.67 million in FY Mar 2016 (FY Mar 2015: +RM29.37 million). The losses can also be attributed to a lagged response to the mispricing of products at the Group’s mini-markets and convenience stores. These factors, along with rising costs and poorer sales amid the sombre consumer sentiment, wiped out Mydin Holdings’ margins, leading to losses across most of its operating segments.

In line with its poor performance, Mydin Holdings’ financial metrics also weakened, resulting in the breach of financial covenants under the Al-Kafalah (guarantee) agreement with Danajamin. Given an increased debt load and the erosion of the Group’s equity base, its adjusted gearing ratio came in higher at 4.66 times as at end-March 2016 (end-March 2015: 3.52 times). Meanwhile, the Group’s adjusted FFO and OCF debt cover deteriorated to 0.06 and 0.07 times, respectively, in FY Mar 2016 (FY Mar 2015: 0.13 and 0.07 times).

While Mydin Holdings’ performance is anticipated to improve in FY Mar 2017 following a gradual increase in prices since June 2016, it is expected to continue to deliver weak earnings, considering that price adjustments were mostly completed only in September 2016 and the Group recorded operating and pre-tax losses for 1H FY Mar 2017. The Group’s liquidity profile is deemed tight while its balance sheet and cashflow protection metrics are envisaged to remain pressured in view of high debt levels. Nevertheless, the Group is expected to recognise a one-off gain of around RM98.72 million from the sale of its Seremban mall, which should help cushion its weak performance and tight liquidity position.

Analytical contact                                            Media contact
Chan Yisze                                                        Padthma Subbiah
(603) 7628 1111                                                (603) 7628 1162
yisze@ram.com.my                                          padthma@ram.com.my