FW: RAM Ratings reaffirms Poh Kong's sukuk ratings

 

Published on 27 Nov 2017.

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 ICP/IMTN Programme (2011/2018). The enhanced long-term rating reflects the irrevocable and unconditional financial guarantee from Danajamin Nasional Berhad (rated AAA/Stable/P1 by RAM), which enhances the credit profile of the ICP/IMTN beyond the Group’s stand-alone credit strength. The P1 rating mirrors Poh Kong’s stand-alone credit profile, notwithstanding the financial guarantee on the ICP.

Despite the still-weak consumer sentiment, Poh Kong recorded higher sales in FY Jul 2017 as consumers invested in gold amid global uncertainties. Coupled with stronger gold prices, this lifted the Group’s top line 12.9% y-o-y. Its operating profit before depreciation, interest and tax (OPBDIT) jumped 42.1% y-o-y for the fiscal year on the back of higher revenue, reduced losses from the closure of unprofitable outlets, and various cost-saving initiatives. 

Poh Kong’s adjusted funds from operations (FFO) debt cover expanded y-o-y to 0.28 times in fiscal 2017 (fiscal 2016: 0.19 times), in line with its better operating performance and lighter debt load. These factors, as well as a revaluation gain, improved the Group’s adjusted gearing and net gearing ratios to a respective 0.45 times and 0.35 times as at end-July 2017 (end-July 2016: 0.56 times and 0.49 times, respectively). Going forward, the Group’s balance sheet is anticipated to stay sturdy, with adjusted FFO debt coverage remaining around 0.20-0.30 times. Meanwhile, Poh Kong derives substantial liquidity from its gold inventory, which is considered liquid and valuable.

Apart from its healthy credit metrics, Poh Kong’s stand-alone credit strength continues to be supported by its established reputation and strong market position in the local jewellery retail industry. With 93 outlets (as at end-July 2017), the Group is the largest jewellery retail chain in Malaysia and boasts a 4-decade operating history. 

Poh Kong’s credit profile is, however, moderated by its vulnerability to volatile gold prices and forex rates. Gold prices have been affected by macroeconomic uncertainties such as the US presidential election, expectations of US Fed rate hikes, and more recently elections in the EU as well as tensions between the US and North Korea. In ringgit terms, local gold prices were impacted by the weak ringgit against the US dollar; the ringgit has since strengthened against the greenback. While the retail mark-up on yellow gold provides a buffer against gold-price volatility, Poh Kong remains susceptible to sharp declines in the price of gold, given that input cost lags movements in retail prices. 

Another moderating factor is Poh Kong’s hefty working-capital requirements, attributable to its long inventory cycle and the build-up of requisite inventory for the Group’s wide retail network. The Group is also subject to consumer sensitivity to movements in gold prices as well as stiff competition within a trend-driven industry. The Group may find it challenging to maintain its brand relevance among the younger generation going forward, given the diminishing preference for gold jewellery in this consumer segment.

 

Analytical contact
Chan Yisze 
(603) 7628 1111
yisze@ram.com.my

Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my