MARC AFFIRMS SUKUK RATINGS OF TSH SUKUK IJARAH SDN BHD AND TSH SUKUK MUSYARAKAH SDN BHD

Apr 20, 2012 -

MARC has affirmed its ratings on the following rated programmes with a stable outlook:

RM100.0 million Sukuk Ijarah Commercial Papers (Sukuk ICP) and RM300.0 million Sukuk Ijarah Medium Term Notes (Sukuk IMTN) Programmes of TSH Sukuk Ijarah Sdn Bhd (TSH Ijarah) at MARC-1IS/AA-IS; and
RM100.0 million Guaranteed Islamic Medium Term Notes (IMTN) Programme of TSH Sukuk Musyarakah Sdn Bhd (TSH Musyarakah) at AAAIS(fg).
The rating actions affect outstanding notes of RM245.0 million issued under TSH Ijarah and RM50.0 million issued under TSH Musyarakah.

The issuers are special purpose funding vehicles created to facilitate the issuance of notes under the rated programmes on behalf of parent company, TSH Resources Berhad (TSH or the group). The group is involved in oil palm cultivation and bio-integration, wood product manufacturing and trading, and cocoa manufacturing and trading, with the bulk of its revenue and earnings derived from its palm oil-based operations.

The affirmed sukuk ratings of TSH Ijarah reflect the standalone credit profile of TSH and its standalone short and long-term senior debt ratings of MARC-1 and AA-. TSH’s standalone ratings incorporate the continued good performance of its oil palm plantation business, its sustained operating cash flow (CFO) generation and satisfactory debt service coverage on a consolidated basis. These credit strengths are moderated by the lacklustre operating performance of its wood products and cocoa business, its continuing negative free cash flow and the sensitivity of its financial performance to palm oil price cyclicality. The stable outlook reflects MARC’s expectation that TSH will continue to exhibit revenue and earnings growth as returns are generated from plantation capital expenditure made during earlier periods. MARC opines that TSH’s ability to generate positive free cash flow, improve its liquidity metrics and maintain its financial flexibility will depend on sufficiently supportive industry conditions as well as controlled plantation development expenditure on the part of the group.

The affirmed sukuk rating of TSH Musyarakah, meanwhile, reflects an unconditional and irrevocable guarantee provided by Danajamin Nasional Berhad (Danajamin). The supported rating is premised on Danajamin’s financial strength, which MARC has rated at AAA/stable on the basis of its strong capital resources and claims-paying ability relative to its risk exposure, and its status as a government-sponsored financial guarantee insurer (FGI). Sukukholders of TSH Musyarakah are insulated from any downside risks in TSH’s consolidated credit profile by virtue of the guarantee provided by Danajamin. Any changes in the supported rating or rating outlook will be primarily driven by changes in Danajamin’s credit rating/outlook.

TSH’s strong operating profitability and financial position have been largely driven by its plantation business in recent years. Based on unaudited results, TSH’s oil palm plantation business contributed 90% of consolidated revenue (FY2010: 83%), and nearly all of consolidated profit for the financial year ended December 31, 2011 (FY2011). MARC notes the robust growth in TSH’s fresh fruit bunch (FFB) production which grew by 16%, 21% and 43% in FY2009, FY2010 and FY2011 respectively. As at December 31, 2011, its mature hectarage accounted for about 54% of its total planted hectarage while 46% of its planted hectarage comprises palm trees aged below four years. The maturity profile of the group's planted oil palm estates is expected to provide an annual 18.5% and 21% increase in mature hectarage and FFB production respectively in the near-to-intermediate term. The focus of the oil palm segment’s expansion activity has been in Indonesia, which accounts for 95% of the group’s total land bank of 98,454 hectares (ha) as at end-2011. Approximately 70% of the group’s landbank is unplanted. In this context, MARC notes that the group has exercised prudence in its planting programme to forestall deterioration in its credit metrics.

TSH’s revenue for FY2011 increased by 26.4% to RM1.15 billion (FY2010: RM908.4 million) while its pre-tax profit increased by 54.2% to RM162.4 million (FY2010: RM105.3 million). Operating profit margins also continued to improve year-on-year to 14.5% in FY2011 from 12.6% in FY2010 and 10.4% in FY2009. The improved financial performance was attributable solely to the revenue and earnings growth of palm oil plantation business which has more than offset the lacklustre financial performance of other divisions. Revenue from the wood products continued to decline year-on-year in FY2011, falling to RM49.6 million from RM66.6 million in FY2010, with segment losses widening to RM5.2 million (FY2010: -RM4.4 million). Revenue from the cocoa division also declined to RM63.1 million from RM85.4 million in FY2010, resulting in lower profit of RM2.1 million (FY2010: RM8.8 million). Both these divisions are export-based, with significant exposure to the Europe and US markets, which have been experiencing challenging economic conditions.

TSH’s free cash flow remained negative in FY2011, however, the deficit was smaller than previous years at RM3.7 million compared to negative RM26.6 million the year before. The group has been moderating its budgeted 5,000 ha per year oil palm planting programme to ease pressure on its leverage and cash flow metrics. The group’s debt-to-equity ratio, meanwhile, improved to 0.78 times (x) as at end-2011 from 0.85x on account of internal capital generation during the year. As in previous years, the group continues to exhibit a strong commitment to preserve its standalone credit ratings, which MARC has taken into consideration in attaching a stable outlook to the sukuk ratings of TSH Ijarah.

Contacts:
Goh Shu Yuan, +603-2082 2268/ shuyuan@marc.com.my;
Francis Xaviour Joe, +603-2082 2279/ fxjoe@marc.com.my.

MARC AFFIRMS ITS AAIS RATINGS ON WESTPORTS’S SUKUK ISSUANCES

Apr 19, 2012 -

MARC has affirmed its sukuk ratings of AA+IS on Westports Malaysia Sdn Bhd’s (Westports) Sukuk Muyarakah (Sukuk) Programme of up to RM2.0 billion and Sukuk Musyarakah Medium Term Notes (MTN) Programme of up to RM800 million. The rating outlook for both issues is stable. The affirmed ratings incorporate Westports’ strategic location and strong operational track record that has made it Port Klang’s leading terminal and a major local and transhipment hub, and the port’s fairly robust container volume throughput. Furthermore, Westports’ expansion programme will position the port operator strongly to attract and service the largest of post-Panamax vessels. These credit strengths are constrained by the company’s susceptibility to volatility in cargo volumes, whether as a result of downturns in global trade or fewer shipping lines calling on the port, client concentration, heavy capex programme and fairly aggressive dividend policy.

Westports continued to register strong growth in container throughput which rose to 6.4 million twenty-foot-equivalent units (TEU) in 2011 against earlier projections of 6.0 million TEU (2010:5.6 million TEU). Westports’ transhipment activity benefited from a pickup in the global trade along the Asia-Europe shipping route and growth in local import and export activity as a result of increasing trade between Malaysia and China. Westports’ competitive advantage over domestic and regional ports is derived from its strong operational efficiencies, Port Klang’s strategic location along one of the world’s busiest shipping routes and competitive pricing vis-à-vis its main competitor, Singapore Port.

The port operator posted a 14.4% increase in its revenue to RM1.12 billion for the financial year ended December 31, 2011 (FY2011); Westports’ pre-tax profit however, showed a 6.8% decline year-on-year to RM358.86 million. Westports’ cash flow from operations (CFO) improved marginally to RM444.2 million (2010: RM433.7 million); however, the company’s free cash flow turned negative, from positive RM234.6 million to negative RM345.5 million on the back of its expansion programme and a significant dividend payout in 2011. As at December 31, 2011, Westports’ balance sheet cash amounted to RM349.7 million after redeeming RM100 million of borrowings under its MTN programme in March 2011 with borrowing availability under existing credit facilities and the rated programmes at RM2.1 billion. Westports has also redeemed a further RM100 million of its MTN programme in March 2012. MARC believes that Westports’ liquidity profile will remain satisfactory in coming quarters in spite of its large planned capital spending in FY2012. Its capex of RM639.9 million on land reclamation works, construction of the second phase of Container Terminal 6 (CT6) and corresponding container yard and port machinery will be funded through additional borrowing of RM200 million, internally generated funds and the expected receipt of a government grant.

MARC expects Westports’ operating margin to remain under pressure over the next two financial years with the first phase of CT6 in ramp-up phase and construction of the second phase scheduled for completion by January 2013, in combination with the competitive pricing environment. Manpower costs, marketing rebates and fuel costs have been on the rise of late. The rating agency further notes that Westports is expected to operate at a higher level of leverage over the upcoming quarters on account of heavy capital expenditure and anticipated negative free cash flow. Of key importance to Westports’ credit quality will be the port operator’s ability to consistently generate the level of growth in containerised cargo volumes needed to offset the impact of increased debt taken to finance the port’s expansion and the incremental operating costs of CT6. MARC is somewhat concerned that weaker global growth could limit potential growth in container volume throughput in the coming quarters and constrain Westports’ ability to raise port tariffs as attracting and retaining traffic assumes top priority.

The stable outlook assumes that Westports’ will exhibit satisfactory container volume and revenue growth to maintain appropriate credit metrics for the current ratings. A significant departure from expectations could lead to downward pressure on the ratings.

Contacts:
Sandeep Bhattacharya, +603-2082 2247/ sandeep@marc.com.my;
Jason Kok, +603-2082 2258/ jason@marc.com.my;
Ahmad Tajuddin Yeop Adnan, +603-2082 2256/ tajuddin@marc.com.my.

MARC has affirmed its rating on Kapar Energy Ventures Sdn Bhd's (KEV) RM3,402.0 million Bai' Bithaman Ajil Islamic Debt Securities (BaIDS) at AA+ID with a stable outlook

The affirmed rating takes into account the recent improvement in KEV's operating and financial performance, as well as the rating agency's expectation of a very high probability of parental support from Tenaga Nasional Berhad (TNB). Since MARC's last rating action, KEV's financial performance has significantly turned around as a result of higher electricity sales and reduced power generation outages. KEV posted a pre-tax profit of RM134.3 million for the 12 months ended August 31, 2011 (FY2011) after two consecutive years of losses. MARC continues to view KEV as a strategic subsidiary of TNB and maintain its view that there is a very high likelihood that TNB would provide timely capital and funding support to KEV if needed, on account of KEV's strong operational and ownership ties with TNB (rated AAA/Stable).

The stable outlook reflects MARC's expectation that the KEV's multi-fuel thermal power station will demonstrate a satisfactory performance record in the coming quarters and the rating agency's current stable outlook on TNB's issuer and long-term senior debt ratings of AAA. The rating on the BaIDS will be sensitive to negative developments in KEV's stand-alone credit profile, a change in TNB's rating and/or its supportive stance towards KEV. The rating outlook acknowledges the ongoing pressure on TNB's financial profile stemming from unresolved gas supply shortages, however, MARC sees no immediate need to revisit its opinion on support, based on its view that KEV's improving operating and financial performance signals a reduced likelihood that near-term support would be required of TNB to meet forthcoming BaIDS maturities in the next 12 to 18 months.

KEV was established to acquire and operate the Stesen Janaelektrik Sultan Salahuddin Abdul Aziz, or KPS, the largest multi-fuel thermal power station in Malaysia with a 2,420-megawatt (MW) nominal capacity. KPS currently operates four generating facilities (GF) capable of running on coal, natural gas or oil. Distillate, a standby fuel, is also used as a back-up fuel for gas turbines. Fuel supply risks are mitigated by long-term supply agreements with TNB and TNB Fuel Services Sdn Bhd. All fuel costs incurred in generating electricity are passed through to TNB. Under a 25-year Power Purchase Agreement (PPA), KEV receives payments from sole offtaker TNB, comprising monthly capacity payments (CP) and energy payments (EP). CPs are designed to cover fixed operating costs, debt service payments and provide returns to shareholders while EPs cover fuel costs and variable operating costs. However, actual monthly CPs have been negatively affected by a higher level of unplanned outages than allowed under the PPA.

The plant's overall unplanned outage rate improved to 9.83% in FY2011 compared to 15.37%, although outages of GF2 and GF3 still exceeded their PPA specified levels. Capacity revenue increased 24.0% to RM630.6 million. EPs contributed 81.2% of the total revenue due to higher dispatch level of 11,789.9 GWh, up from 6,706.5 GWh in FY2010 to compensate for the shortfall in electricity generation by other gas power plants in Peninsular Malaysia. As a result, KEV recorded a higher operating profit before interest and tax (OPBIT) of RM426.4 million, notwithstanding a 9.2% increase in operating costs due to higher staff costs, administration and operational expenses. Finance costs were lower due to impact of the adoption of FRS139 on interest costs of the redeemable unsecured loan stocks (RULS) as well as the continued debt pay-down. Consequently, KEV recorded its first pre-tax profit of RM134.3 million since FY2008. However, KEV's profitability continues to be constrained by its significant finance costs.

KEV has been meeting its obligations on the BaIDS from its internally generated cash flow while deferring debt servicing on its redeemable unsecured loan stocks (RULS). Unpaid interest due to shareholders on their holdings of KEV's RULS continues to grow despite RULS holders' consent to lower the compounding interest rate from 15% to 5% per annum on unpaid interest after the due date. As of August 31, 2011, KEV owes its shareholders, TNB and Malakoff Berhad, RM476.0 million and RM317.3 million in interest expense on the RULS respectively, up from RM375.4 million and RM250.3 million respectively a year ago. The RULS are subordinated to all KEV's debts, and any redemption is subject to the satisfaction of a distribution test. The full equity credit given to KEV's outstanding RULS of RM892.6 million in the gearing calculation for covenant compliance has enabled KEV to remain in compliance with its gearing covenant of 80:20 (actual: 75:25 as at July 9, 2011).

Despite its improved profitability in FY2011, KEV generated lower cash flow from operations (CFO) of RM456.3 million compared to FY2010's RM533.2 million as a result of an increase in working capital requirements. The aforementioned increase in working capital was contributed by an increase in inventory and higher fuel purchases during the financial year. KEV's average collection period for receivables, meanwhile, improved to 71 days (FY2010: 90 days) notwithstanding the higher trade receivables due from TNB of RM852.1 million (FY2010: RM458.9 million) at year end. Reflecting the lower level of CFO generation, KEV's CFO interest coverage and finance service coverage ratio (FSCR) declined to 2.77 times (x) and 1.25 times respectively (FY2010: 2.97x and 1.37x respectively). MARC notes with some concern KEV's continuing negative net working capital position and the increase in the interest component of coal billing payables to RM81.6 million as of end-August 2011 from RM42.7 million a year ago. Cash balances in KEV's designated accounts which totalled RM317.1 million after its January 6, 2011 BaIDS redemption are sufficient to meet its next BaIDS obligation of RM203.9 million on July 6, 2012, comprising RM136 million of principal repayment and RM67.9 million of profit payment.

Contacts: David Lee, +603-2082 2255/david@marc.com.my; Sandeep Bhattacharya, +603-2082 2247/sandeep@marc.com.my.

MARC AFFIRMS ITS MARC-2ID/AID RATINGS ON SYMPHONY HOUSE BERHAD’S RM100.0 MILLION ISLAMIC CP/MTN PROGRAMME; REVISES OUTLOOK TO NEGATIVE

Apr 18, 2012 -

MARC has affirmed its ratings of MARC-2ID/AID on Symphony House Berhad's (Symphony) RM100.0 million Islamic Commercial Papers/MediumTerm Notes (Islamic CP/MTN) Programme and revised the outlook to negative from stable. The rating action affects RM20 million of outstanding IMTNs.

The outlook revision reflects the slower-than-expected pace of recovery in Symphony's operating performance and its financial metrics in 2011. Since MARC's last review, losses had widened considerably from the pre-tax loss of RM3.73 million reported for the nine months to September 30, 2010 (9MFY2010) to RM20.55 million for the full year of 2010. The rating agency had expected the group's earnings and cash flow generation to improve meaningfully against 9MFY2010, underpinned by a pick-up in business process outsourcing (BPO) activity as well as satisfactory renewal and account retention levels. However, for 9MFY2011, the group reported a modest pre-tax profit of RM1.76 million and an after-tax loss of RM0.72 million. Its net cash flow from operations (CFO) of RM2.21 million was lower than that of the preceding two years. While recognising the non-recurring nature of some of the factors which caused the weaker performance in recent periods, MARC is concerned that the observed slower-than-expected pace of recovery will leave the group's credit metrics weakly positioned for an extended period of time.

The affirmed ratings, meanwhile, incorporate Symphony's fairly strong competitive positions in several BPO segments including cheque processing, contact management, human resource, and financial & accounting services, through its operating subsidiaries. The ratings also recognise the group's well-diversified customer base, while reflecting the smaller scale of its BPO operations relative to global outsourcing services providers, increasing competition in the domestic BPO industry and margin pressures.

The group's performance for 9MFY2011 was below MARC's expectations. Symphony recorded a pre-tax profit of RM1.76 million on revenue of RM139.74 million, against a pre-tax loss of RM3.73 million on revenue of RM126.09 million for 9MFY2010. Symphony BPO Solutions Sdn Bhd (SBPO) which accounts for over 70% of Symphony's consolidated revenue, recorded losses in 9MFY2011 in spite of posting higher revenue. The consolidated results were impacted by losses from the closure of SBPO's loss-making contact management business in Japan, the non-renewal of cheque processing service contracts and increasing operating costs. Symphony's human resources, and financial and accounting BPO segments, nonetheless, were able to maintain relatively stable margins. Consolidated cash flow coverage measures have also weakened significantly from historical levels, as evidenced by 9MFY2011's marginal CFO interest coverage ratio of 1.09 times and negligible CFO debt coverage. Cash and cash equivalents stood at RM27.1 million relative to total borrowings of RM44.2 million, which, together with the expectation that FY2012 CFO generation will improve against FY2011, somewhat moderates the refinancing risk with respect to outstanding notes. The notes programme expires in 2013.

The ratings could be lowered in the event that Symphony's credit metrics do not strengthen meaningfully relative to end-September 2011 levels. Alternatively, the outlook could revert to stable in the event that the group demonstrates substantial improvement in earnings and cash flow generation, allowing a marked strengthening of its financial metrics.

Contacts:
Ruben Khoo, +603-2082 2265 / rubenkhoo@marc.com.my;
Sandeep Bhattacharya, +603-2082 2247/ sandeep@marc.com.my.

MARC AFFIRMS TENAGA NASIONAL BERHAD'S ISSUER AND LONG-TERM DEBT RATINGS OF AAA AND AAAID RESPECTIVELY; OUTLOOK STABLE

Apr 18, 2012 -

MARC has affirmed Tenaga Nasional Berhad’s (TNB) issuer rating of AAA and the utility's Islamic debt ratings at AAAID for the following outstanding issues: i) RM1.0 billion Al-Bai’ Bithaman Ajil Notes Issuance Facility; and ii) RM2.0 billion Al-Bai’ Bithaman Ajil Bonds. The outlook is stable. The affirmed ratings continue to incorporate support uplift for TNB's obligations, deriving from its key role in the national energy policy as the country's principal energy supplier. The fully integrated electricity utility operates Malaysian’s national grid and accounts for 48.3% of the generation output in Peninsular Malaysia. MARC’s support assessment also considers TNB’s status as a government-controlled entity and the Malaysian government's golden share in TNB which carries veto power over major decisions at the company. The ratings are further supported by TNB’s stable revenue base, sound operational record and strong financial flexibility.

Rating stability is underpinned by TNB’s continuing economic importance which should ensure a high degree of government support to sustain current ratings going forward, notwithstanding the persisting challenge of securing sufficient and timely tariff increases to cover the cost of supply. MARC acknowledges the challenges that continue to confront TNB stemming from domestic gas supply shortages and the high import costs of natural gas. TNB’s operating profitability and debt service coverage weakened notably for the financial year ended August 31, 2011 (FY2011) as a result of the curtailment of gas supply. MARC expects continued pressure on the utility’s credit metrics in the absence of mitigating developments with respect to its exposure to volatile and rising fuel prices.

In FY2011, TNB’s revenue grew by 6.2% to RM32.21 billion (FY2010: RM30.32 billion) due to steady electricity demand in Peninsular Malaysia and Sabah in line with the country’s GDP growth and an upward revision in electricity tariffs on June 1, 2011. The natural gas curtailment resulted in TNB switching to oil and distillates which are priced about five times higher than the price of subsidised natural gas. This led to a significant reduction in EBITDA margin from 26.8% in the previous year to 16.1% in FY2011. Based on MARC’s estimates, the usage of oil and distillates in place of natural gas is expected to cost TNB an approximate additional RM10 million per day. MARC views the recent sharing of oil and distillate costs among TNB, PETRONAS and the Malaysian government between January 2010 through October 2011 an interim measure to reduce financial pressure on TNB arising from the on-going gas curtailment. TNB is still expected to face gas supply shortages until the commissioning of Malaysia’s first liquefied natural gas (LNG) import terminal in Melaka by September 2012.

Post commissioning of the aforementioned LNG import terminal, MARC is mindful that TNB will need to purchase the imported natural gas at market prices which are about four times higher than the current subsidised gas prices of RM13.70 per million metric British Thermal Units (mmBTU). Although the government announced in June 2011 a new fuel cost pass-through (FCPT) mechanism for the power sector, it remains to be seen whether there will be full pass-through of fuel costs increases in the end-user tariff during subsequent semi-annual reviews. The last annouced electricity tariff had reflected an upward revision of natural gas prices to power sector by 28.0% to RM13.70 per mmBTU while maintaining the coal costs at its existing tariff-compensated level of USD85 per metric tonne (MT), a level unchanged since March 2009. In FY2011, in addition to the higher cost of oil and distillates, TNB incurred further USD414 million in burning coal due to the increase in average coal price to USD106.9 per MT from USD88.2 per MT in FY2010. Capital expenditure on ongoing projects, system improvements and new supply works which increased by 31.3% to RM5.59 billion (FY2010: RM4.26 billion) had, in addition, to its lower operating cash flow generation, resulted in negative free cash flow of RM2.02 billion in FY2011 (FY2010: positive RM3.35 billion). TNB’s cash and bank balances declined to RM3.95 billion (FY2010: RM8.34 billion) consequently.

TNB’s debt-to-equity ratio improved to 0.63 times (FY2010: 0.70 times) as the group pared down its borrowings by RM2.17 billion during the year through repayments and repurchase of existing borrowings. In view of the group’s upcoming capital expenditure plans, including the RM6.6 billion 1,000MW Janamanjung expansion and RM4.3 billion planned hydroelectric projects in Ulu Jelai and Hulu Terengganu, TNB’s borrowings are expected to increase until FY2015, in light of its projected annual capital expenditure of RM4.5 billion excluding these new power plants.

While a more transparent and predictable tariff process would be desired as opposed to ad-hoc adjustments and/or cost relief to offset cost pressures as recently seen at TNB, MARC continues to maintain its view that full and timely support for TNB’s obligations would be forthcoming from the Malaysian government when required. However, as the form and timing of recent support suggests, TNB's credit measures will be subject to greater volatility and will likely to remain under pressure over the immediate term.

Contacts:
Ahmad Tajuddin Yeop Aznan, +603-2082 2256/ tajuddin@marc.com.my;
David Lee, +603-2082 2255/ david@marc.com.my;
Sandeep Bhattacharya, +603-2082 2247/ sandeep@marc.com.my.

RAM Ratings revises outlook on Naim’s Islamic securities to negative; ratings unchanged

Published on 13 April 2012

RAM Ratings has revised the outlook on the long-term rating of Naim Holdings Berhad’s (“Naim” or “the Group”) RM500 million Islamic Medium-Term Notes Programme (2010/2025) (“IMTN”), from stable to negative. However, the respective long- and short-term ratings of AA3 and P1 for the IMTN and RM100 million Islamic Commercial Papers Programme (2010/2017) (collectively, “the Islamic Securities”) remain unchanged.

Naim is a property-development and construction group based in Sarawak. It also holds a 34%-stake in Dayang Enterprise Holdings Berhad, a listed provider of oil and gas support services. The revised outlook is premised on Naim’s weakened financial profile as a result of the slow progress of its contracts in hand, absence of notable new contracts, deferred property launches and delayed project implementation. Moving forward, the Group’s credit profile is likely to be constrained by its slower construction division and plans for hefty debt-funded capital expenditure. The Group is also facing keener competition within the construction sector, resulting in thinner margins. While we believe Naim still stands a good chance of clinching new jobs under various economic initiatives, including the Sarawak Corridor of Renewable Energy, the timing of their implementation is uncertain.

The Group’s weak showing since 1Q FY Dec 2011 resulted in a 33.1% year-on-year (“y-o-y”) plunge in its top line to RM409.65 million for the full year (FY Dec 2010: RM612.69 million); its construction division suffered operating losses since 3Q. This deviates substantially from our initial expectations. We note that Naim’s construction division had realised lower contract billings following delays caused by land issues, bleak weather and design changes. The division also did not manage to secure any notable new contracts last year. At the same time, the property division’s progress billings had declined due to delayed launches of new projects. The Group’s dwindling top line and fixed overheads as well as heftier interest costs led to an operating loss before tax of RM4.31 million in fiscal 2011 (FY Dec 2010: RM96.89 million profit).

Naim could deliver a better showing this year if its projects progress as scheduled. This is based on the management’s timeline for its RM685.4 million order book (as at end-December 2011), higher unbilled sales from properties launched in 2H 2011 and the accelerated development of its property projects. Even based on this pipeline, however, it is still likely to come below our earlier projections. The recovery of Naim’s financials hinges on its ability to replenish its order book. Although the Group seeks to secure about 8% of the RM6 billion of projects tendered, the uncertain timing of contract awards and/or implementation may dampen its replenishment efforts.

Moving forward, Naim plans to incur hefty debt-funded capital expenditure to acquire land and investment properties; its gearing ratio could exceed 0.6 times while its operating profit before depreciation, interest and tax debt coverage may sink below 0.15 times over the next 3 years. These ratios are weak for the rating. As at end-December 2011, Naim’s debt load had swelled to RM347 million (end-December 2010: RM125.11 million), with corresponding gearing and net gearings of 0.45 and 0.17 times, respectively (end-December 2010: 0.17 and 0.12 times).

Naim’s ratings may face downward pressure if its recovery is slower than anticipated and/or its financial metrics weaken beyond the acceptable level for the ratings. Alternatively, the rating outlook may be reverted to stable if the Group is able to replenish its order book, sustain the uptrend in its unbilled sales and demonstrate robust improvement in its business and financial profiles. RAM Ratings will be conducting our annual review of the Islamic Securities within the next 3 months.

Media contact
Ben Inn
(603) 7628 1024
ben@ram.com.my

RAM Ratings reaffirms AAA rating of Cagamas MBS's CMBS 2007-1-i, with stable outlook

Published on 13 April 2012
RAM Ratings has reaffirmed the AAA rating of Cagamas MBS Berhad’s RM2.11 billion Islamic residential mortgage-backed securities (“RMBS”), i.e. CMBS 2007-1-i, with a stable outlook. The reaffirmation is premised on the available overcollateralisation (“OC”) ratio of 28.14% (as at the reporting date of 29 November 2011), supported by the overall performance of the collateral pool, and the credit enhancement afforded by the transaction structure. The stable outlook reflects RAM Ratings’ opinion that the trends in defaults and losses, as well as prepayments on the government staff Islamic home financing facilities (“GSIHFs”), will continue to fall within our expectations.

The OC ratio is calculated against RM2.03 billion of outstanding GSIHFs and RM246.69 million of cash and permitted investments. This level of OC provides sufficient protection against the risk of prepayment, negative variance of investment returns and defaults under an “AAA” stressed scenario.

As at 31 July 2011, the portfolio of GSIHFs comprised 24,696 accounts, with an average outstanding balance of RM82,367 per account; the portfolio’s weighted-average remaining term came up to 16.76 years. As at the same date, the cumulative net default rate for the underlying financing portfolio stood at 0.43%, as a percentage of the principal balance on the purchase date – this is well below RAM Ratings’ base-case assumption. While the cumulative prepayment rate on the underlying GSIHFs stood at 3.85%, i.e. lower than RAM Ratings’ base-case assumption, prepayments in the last 2 years have been hovering at higher levels than the initial years. We expect prepayments to pick up as the pool becomes more seasoned through time.

More recently, it was announced that civil servants under the revised Malaysian Remuneration System (Sistem Saraan Malaysia) will receive 7%–13% salary increments, expected to be paid out sometime in April 2012. However, given that the profit rates on the GSIHFs are below current market levels and mounting concerns over the rising cost of living, RAM Ratings expects the salary adjustment to cause minimal spikes in prepayment levels.

As highlighted in our last review, a lower-than-assumed prepayment rate - albeit with no material impact on the transaction’s rating at this juncture - exposes the transaction to higher liquidity risk. On this front, RAM Ratings will maintain close monitoring of this transaction to ensure that its rating reflects the overall credit quality of the collateral pool and the credit support afforded by the structure.

Based on the closing cash balance of RM246.69 million (inclusive of permitted investments) as at 29 November 2011 and an expected monthly net cash inflow of approximately RM10 million, we expect the transaction to accumulate sufficient funds by 29 May 2012 to redeem the RM255 million Tranche 2 RMBS falling due. Upon full redemption of Tranche 2, RM1.525 billion of the RMBS (i.e. Tranches 3 to 7) will remain outstanding.

Media contact
Lee Sook Wei
(603) 7628 1017
sookwei@ram.com.my

MARC AFFIRMS ITS AAA(bg) RATING ON BOUSTEAD HOLDINGS BERHAD'S RM1.0 BILLION BANK GUARANTEED MTN PROGRAMME

Apr 10, 2012 -

MARC has affirmed its rating on Boustead Holdings Berhad’s (Boustead Holdings) RM1.0 billion Bank Guaranteed Medium Term Notes (BG MTN) programme at AAA(bg) with a stable outlook. The rating reflects the credit strength of the syndicated bank guarantee facility provided by OCBC Bank (Malaysia) Berhad (OCBC Malaysia), Public Bank Berhad (Public Bank), Malayan Banking Berhad and The Bank of East Asia (BEA) Labuan Branch. MARC maintains financial institution ratings on all four banks of AAA/Stable, of which the ratings on OCBC Malaysia and Public Bank are based on public information. Any subsequent rating actions on the rated programme will reflect a 'weak link' approach to credit enhancement; the rating on the BG MTN programme cannot be higher than that of the lowest rated supporting financial institution. The rating action affects RM840.0 million of BG MTN outstanding under the rated programme.

Boustead Holdings is a holding company which owns a diverse portfolio of subsidiaries and associates engaged in plantation, property, pharmaceutical, trading & manufacturing, heavy industries and finance & investment businesses. Following MARC’s initial rating on the BG MTN programme, the 61.4%-owned subsidiary of the Malaysian Armed Forces Fund Board, Lembaga Tabung Angkatan Tentera (LTAT) completed two major acquisitions during 2011. The holding company had initially acquired up to 97.8% Pharmaniaga Berhad (Pharmaniaga), a company which holds a ten-year concession with the Ministry of Health (MOH) for the supply and distribution of approved drugs and medical products to government hospitals and clinics, but is in the process of reducing its stake to comply with Bursa Malaysia’s 25% public spread requirement for listed companies. It also completed its acquisition of a 51% interest in helicopter services provider MHS Aviation Berhad which mainly services the oil and gas industry.

Boustead Holdings' consolidated results for the financial year ended December 31, 2011 (FY2011) improved with revenue increasing 38.4% to RM8,555.8 million (FY2010: RM6,181.8 million) and pre-tax profit growing 14.4% to RM831.0 million (FY2010: RM726.2 million). The improved financial performance was underpinned by the maiden contribution from Pharmaniaga and growth across nearly all its business divisions, which compensated for the weaker-than-expected performance of the heavy industries division due to cost escalations on certain commercial shipbuilding projects. Comparing the group’s operating cash flow (CFO) to the year before, MARC notes that CFO generation was restored in FY2011 to RM903.0 million (FY2010: RM173.4 million; FY2009: RM604.9 million), however, the group’s capital expenditure and cash outlays on the construction of investment properties continued to weigh on its free cash flow generation. The group remained free cash flow negative in FY2011, although the deficit was notably smaller at RM241.4 million compared to RM521.1 million the year before. The acquisitions and capital spending have led to increased debt levels, as evidenced by the increase in Boustead Holdings’ consolidated debt-to-equity ratio to 0.98x (FY2010: 0.67x). MARC expects capital spending to moderate somewhat in FY2012, which, coupled with an adequate consolidated operating performance over the next several quarters, should aid the strengthening of its cash flow protection metrics.

Since the initial rating, holding company level credit metrics have weakened somewhat. MARC notes that cash outlays for the holding company’s investments in FY2011 were funded by additional borrowings, of which 59.8% were short-term borrowings. This caused the holding company’s debt-to-equity ratio to almost double to 0.91 times (x) (FY2010: 0.47x) and its finance costs to increase significantly. MARC opines that further drawdowns under the rated programme and additional borrowings could translate to increased pressure on operating subsidiaries to upstream dividends to meet the holding company’s debt servicing obligations. Further, the rating agency believes that Boustead Holdings’ reliance on short-term borrowings to finance investments of longer gestation periods could expose the holding company to higher liquidity and refinancing risks, although this is somewhat mitigated by its continued good access to bank loans and the domestic capital market. In FY2011, cash dividends received from its subsidiaries and associate companies totalled RM255.9 million compared to RM264.0 million in the previous financial year. However, the holding company paid out dividends of RM302.6 million (FY2010: RM337.7 million) and interest on borrowings of RM102.1 million (FY2010: RM63.4 million), which in the rating agency’s opinion continues to reflect an aggressive dividend policy. MARC believes that a sustained improvement in the overall dividend generation capacity of Boustead Holdings’ subsidiaries, acquisition discipline and a prudent dividend policy will be fundamental to strengthening the holding company’s cash flow protection measures.

Noteholders are insulated from the downside risks in relation to Boustead Holdings’ credit profile by virtue of the irrevocable and unconditional bank guarantee provided by the consortium of banks. Any changes in the supported rating or rating outlook will be primarily driven by changes in the consortium of banks’ credit rating/outlook.

Contacts:
Se Tho Mun Yi, +603-2082 2263/ munyi@marc.com.my;
Sabesh Parameswaran, +603-2082 2260/ sabesh@marc.com.my;
Francis Xaviour Joe, +603-2082 2279/ fxjoe@marc.com.my.

MARC DOWNGRADES SCOMI GROUP BERHAD’S RM500 MILLION MTN PROGRAMME TO A FROM A+, PLACES THE RATING ON MARCWATCH NEGATIVE

Apr 9, 2012 -

MARC has downgraded its rating on Scomi Group Berhad’s (Scomi or group) RM500 million Medium Term Notes (MTN) programme to A from A+ and concurrently placed the rating on MARCWatch Negative. The rating action affects RM200 million of outstanding MTNs.

The downgrade follows the release of Scomi’s unaudited results for the financial year ended December 31, 2011 (FY2011). While Scomi had earlier posted an unaudited pre-tax profit of RM47.7 million for the first half of the financial year at the time of MARC’s October 2011 rating action, the full year results shows larger pre-tax losses of RM238.1 million compared to FY2010’s pre-tax loss of RM174.8 million. The full-year losses have eroded its capital base, which in turn saw its gearing as measured by the debt-to-equity ratio increase to 1.86 times (x). The downgrade reflects the group’s weak operating performance, negative discretionary cash flow and limited financial flexibility. Scomi is currently in breach of its covenanted debt-to-equity ratio of 1.25x, while its annual debt service cover ratio (ADSCR) for FY2011 was at the minimum required level of 1.50x.

Bondholders have granted Scomi waivers of covenant breaches until the maturity of the notes and consented to a waiver of scheduled sinking fund build-up payments which were to be used for the redemption of outstanding RM200 million notes due in September 2012. The group has proposed a corporate exercise involving an internal restructuring at its subsidiary company to upstream cash to the holding company and disposal of certain oil and gas assets, the proceeds of which will be used to partially pay down the bond. Scomi intends to pursue a refinancing for the remaining bond.

The negative MARCWatch placement incorporates the execution risk associated with the aforementioned corporate exercise given the constrained timeframe of less than six months to complete the transactions. MARC understands that the proceeds from the asset disposals and upstreaming of cash to the holding company are expected to be received by end-June 2012 and end-August 2012 respectively, while the refinancing exercise is expected to be completed by September 28, 2012. MARC will continue to monitor the developments, and will resolve the MARCWatch listing upon the completion of the corporate exercise. The rating will likely be lowered in the event of slippages in the indicated timetable for the corporate exercise.

Contacts:
Se Tho Mun Yi, +603-2082 2263/ munyi@marc.com.my;
Sabesh Parameswaran, +603-2082 2260/ sabesh@marc.com.my;
Francis Xaviour Joe, +603-2082 2279/ fxjoe@marc.com.my.

MARC DOWNGRADES SCOMI GROUP BERHAD’S RM500 MILLION MTN PROGRAMME TO A FROM A+, PLACES THE RATING ON MARCWATCH NEGATIVE

Apr 9, 2012 -

MARC has downgraded its rating on Scomi Group Berhad’s (Scomi or group) RM500 million Medium Term Notes (MTN) programme to A from A+ and concurrently placed the rating on MARCWatch Negative. The rating action affects RM200 million of outstanding MTNs.

The downgrade follows the release of Scomi’s unaudited results for the financial year ended December 31, 2011 (FY2011). While Scomi had earlier posted an unaudited pre-tax profit of RM47.7 million for the first half of the financial year at the time of MARC’s October 2011 rating action, the full year results shows larger pre-tax losses of RM238.1 million compared to FY2010’s pre-tax loss of RM174.8 million. The full-year losses have eroded its capital base, which in turn saw its gearing as measured by the debt-to-equity ratio increase to 1.86 times (x). The downgrade reflects the group’s weak operating performance, negative discretionary cash flow and limited financial flexibility. Scomi is currently in breach of its covenanted debt-to-equity ratio of 1.25x, while its annual debt service cover ratio (ADSCR) for FY2011 was at the minimum required level of 1.50x.

Bondholders have granted Scomi waivers of covenant breaches until the maturity of the notes and consented to a waiver of scheduled sinking fund build-up payments which were to be used for the redemption of outstanding RM200 million notes due in September 2012. The group has proposed a corporate exercise involving an internal restructuring at its subsidiary company to upstream cash to the holding company and disposal of certain oil and gas assets, the proceeds of which will be used to partially pay down the bond. Scomi intends to pursue a refinancing for the remaining bond.

The negative MARCWatch placement incorporates the execution risk associated with the aforementioned corporate exercise given the constrained timeframe of less than six months to complete the transactions. MARC understands that the proceeds from the asset disposals and upstreaming of cash to the holding company are expected to be received by end-June 2012 and end-August 2012 respectively, while the refinancing exercise is expected to be completed by September 28, 2012. MARC will continue to monitor the developments, and will resolve the MARCWatch listing upon the completion of the corporate exercise. The rating will likely be lowered in the event of slippages in the indicated timetable for the corporate exercise.

Contacts:
Se Tho Mun Yi, +603-2082 2263/ munyi@marc.com.my;
Sabesh Parameswaran, +603-2082 2260/ sabesh@marc.com.my;
Francis Xaviour Joe, +603-2082 2279/ fxjoe@marc.com.my.

MARC AFFIRMS ITS AAAID RATING ON GAS MALAYSIA'S ISLAMIC DEBT PROGRAMME

MARC affirms its rating on Gas Malaysia Berhad's (Gas Malaysia) RM500 million Al-Murabahah Medium Term Notes (MTN) Programme at AAAID with a stable outlook. Currently, there are no outstanding notes issued under the programme.

The affirmed rating reflects Gas Malaysia's satisfactory business risk profile owing to its strong market position as the sole natural gas distributor in Peninsular Malaysia, a major operator of the liquefied petroleum gas (LPG) system and its debt-free financial position. On February 24, 2012, it was announced that Petroliam Nasional Berhad has signed the new gas supply agreement with Gas Malaysia, which extends supply for another ten years with an option for a further five years effective from the expiry of the current contract on December 31, 2012. The new agreement also increases the supply of gas to 492 million standard cubic feet per day (mmscfd) from the current 382 mmscfd, which MARC believes will allow the company to expand its pipeline more rapidly. The agency notes that during the financial year ended December 31, 2011 (FY2011), Gas Malaysia constructed 18.3 km of pipeline, expanded its constructed pipeline network to 1,720.6 km (FY2010: by 100.8 km to 1,702.3 km).

Gas Malaysia, owned by MMC Corporation Berhad-Shapadu Corporation Sdn Bhd (55%), Tokyo Gas-Mitsui Consortium (25%), Petronas Gas Berhad (20%) and one special share held by Petronas, is involved in the selling, marketing and distribution of natural gas and reticulated liquefied petroleum gas for Peninsular Malaysia licensed by the Energy Commission. Gas Malaysia has announced plans for an initial public offering (IPO) on the main market of Bursa Malaysia of 26% of its existing issued share capital. Under the plan, existing shareholders will reduce their holdings in Gas Malaysia to 40.7%, 18.5% and 14.8% respectively. MARC views that the change in Gas Malaysia's ownership structure should, apart from providing access to the capital market, bring about improvements in corporate governance and transparency.

Revenue for FY 2011 increased to RM2.0 billion (FY2010: RM1.81 billion), while pre-tax profit declined to RM294.7 million (FY2010: RM388.4 million). The decline in profitability was due to tariff adjustment in June 2011 which narrowed the spread between the buying and selling price of natural gas to RM2.02 per million British thermal unit (MMBtu) from RM3.95 MMBtu previously, bringing operating cash flow lower to RM261.7 million (FY2010: RM369.4 million). The company has been debt-free since FY2009. MARC understands that no major capital expenditure is planned in the near term, and Gas Malaysia will distribute all its after-tax profits as dividends in FY2012 and proposes to adopt a 75% dividend pay-out policy thereafter.

The stability of this rating will depend on Gas Malaysia's maintenance of its operational and financial strength, a key driver of which will be developments pertaining to its gas supply arrangements.

Contacts: Goh Shu Yuan +603-2082 2268 / shuyuan@marc.com.my; Francis Xaviour Joe +603-2082 2279/ fxjoe@marc.com.my.

MARC AFFIRMS ITS RATING ON TRADEWINDS PLANTATION CAPITAL SDN BHD'S SUKUK IJARAH; CONCURRENTLY AFFIRMS RATINGS ON BANK GUARANTEED CP/MTN AND CP PROGRAMMES

MARC has affirmed its AAAIS and AA+IS ratings on Tradewinds Plantation Capital Sdn Bhd's (Tradewinds Capital) asset-backed RM180 million Class A and RM30 million Class B Sukuk Ijarah (collectively the Sukuk) respectively, with a stable outlook. Wholly-owned by Tradewinds Plantation Berhad (Tradewinds), Tradewinds Capital is a special purpose vehicle established to act as issuer of the sukuk and the lessor in the sale and leaseback transaction of oil palm plantation assets; the sukuk are secured by a portfolio of 12 oil palm plantation estates and three palm-oil mills (the collateral portfolio). The affirmed ratings of the Class A and Class B Sukuk Ijarah reflect satisfactory performance of the securitised plantation assets, higher-than-projected net operating income (NOI) and favourable loan-to-value (LTV) ratios. The stable outlook on the ratings reflects MARC's opinion that the securitised estates will continue to perform within MARC's expectations.

At the same time, MARC has maintained its MARC-1ID(bg) / AAAID(bg) on Tradewinds Capital's RM100 million Bank Guaranteed Murabahah Commercial Paper/Medium Term Notes (BG Murabahah CP/MTN) Programme. The outlook on the ratings is stable. The rating is based on MARC's 'AAA' public information financial institution rating of OCBC Bank (Malaysia) Berhad (OCBCM). Notes issued under the BG Murabahah CP/MTN are fully and unconditionally guaranteed by OCBCM. OCBCM's rating reflects the agency's opinion of the strength of the parent/subsidiary relationship between the Oversea-Chinese Banking Corporation Limited (OCBCS) and OCBCM. In addition, based on the financial strength of OCBCS (rated AAA/stable by MARC), MARC believes that OCBCS possesses strong capacity to support OCBM's operations and financial obligations on a timely basis.

MARC has also affirmed its MARC-1ID rating on Tradewinds Capital's RM90 million Murabahah Commercial Papers with a stable outlook. Unlike the Sukuk Ijarah, the Murabahah CPs and the BG Murabahah CP/MTN are not serviced from the lease rentals and cash flow generated by the plantation assets that are funding Tradewinds Capital's obligations under the Sukuk but are essentially direct obligations of the parent, Tradewinds. The rating and outlook on the non-guaranteed Murabahah CPs therefore mirror the affirmed short-term rating and outlook of Tradewinds. The aforementioned rating reflects Tradewinds' sound liquidity profile, supported by internally generated cash flow and the availability of external liquidity sources in the form of credit facilities. Tradewinds' credit strengths, in particular its favourable plantation maturity profile and strong cash flow generation, are moderated by volatility in crude palm oil (CPO) prices and the rising cost of production inputs, particularly labour, fuel and fertiliser.

As of July 31, 2011, the securitised estates had a total planted area of approximately 17,707 ha, of which 87% comprised mature oil palms between the ages of four and 25 years. The collateral portfolio has continued to benefit from the healthy tree-maturity profiles of these underlying estates as well as some degree of income diversification given their differing individual geographic locations, including Johor, Terengganu and Sarawak. For the seven-month period ended July 2011 (7MFY2011), an increase in fresh fruit bunches (FFB) production output from the collateral portfolio and higher crude palm oil (CPO) prices contributed to a stronger net operating income (NOI) of RM105.7 million. This was substantially higher than the RM54.2 million recorded in 7MFY2010 and MARC's assumed sustainable NOI of RM42.0 million. Furthermore, the securitised palm-oil mills contributed an additional RM16.4 million (7MFY2010: 15.9 million) in NOI to total collateral portfolio earnings.

Based on the observed performance of the securitised assets over the reviewed period (July 31, 2010 to July 31, 2011), stressed debt service coverage ratios have remained consistent with the ratings for the Class A and Class B Sukuk. Principal redemptions have reduced the outstanding amount of Class A Sukuk to RM120.0 million, while the outstanding amount of Class B Sukuk remains at RM30.0 million. Based on the collateral portfolio's initial valuation of RM450.4 million, the LTV ratios for the Class A and Class B Sukuk are 26.6% and 33.3% respectively. Ongoing serial redemption of the sukuk will reduce actual loan-to-value ratios, thereby providing higher collateral backing for the remaining sukuk over time.

Tradewinds' financial performance in recent periods has benefited from an extended period of higher CPO prices. In the first half of its financial year ended December 31, 2011 (1HFY2011), Tradewinds' recorded revenues of RM565.72 million (1HFY2010: RM376.83 million), supported by higher CPO prices, which averaged RM3,380/MT during the period and higher production of palm products. Tradewinds' reported improved profitability; its operating profit margins have been restored to pre-2009 levels. Its stronger cash flow generation in recent periods is reflected in higher-than-FY2009 CFO interest coverage and DSCR levels of 8.58 times and 1.97 times respectively.

MARC regards Tradewinds' acquisition of Mardec Bhd as neutral to its credit profile. Although its consolidated operating profit margins and gearing have weakened following the acquisition, Tradewinds' robust operational cash flow generation and substantial headroom under its credit facilities provide meaningful offset to the downward pressure on the company's consolidated credit profile. A deterioration in Tradewinds' operational cash flows, material erosion of debt protection ratios or a large debt financed acquisition could exert negative pressure on Tradewinds' creditworthiness.

Contacts: Sandeep Bhattacharya, +603-2082 2247/ sandeep@marc.com.my; Ruben Khoo, +603-2082 2265/ rubenkhoo@marc.com.my.

MARC AFFIRMS ITS AAAID/MARC-1ID AND MARC-1ID RATINGS ON SIME DARBY BERHAD’S ISLAMIC DEBT FACILITIES

Apr 6, 2012 -


The outlook on the ratings is stable. The affirmed ratings incorporate the group’s well-diversified business profile across several business segments and geographies and track record of operating profitability in its core business segments of plantation, industrial and motor. At the holding company level, Sime Darby’s strong liquidity position relative to its leverage and favourable financial flexibility arising from its position as a government-linked corporation support the ratings. Notwithstanding these positive factors, business cyclicality and the commodity price volatility as well as weaker global economic conditions could weigh on the holding company’s dividend income and erode the headroom at its current rating level.

Sime Darby’s plantation, industrial and motor divisions have registered strong earnings and profit growth in recent years due to strong commodity prices, robust mining activity in Australia, and stronger vehicle sales in several of its markets, respectively. Its plantation division remains the largest contributor to group revenue and operating profit with 31.5% and 58.6% contribution respectively for financial year ended June 30, 2011 (FY2011). The plantation division’s performance was driven by an increase of 25.7% in the average CPO selling price of RM 2,906/MT as compared to RM 2,311/MT achieved in the corresponding period last year. MARC expects the plantation segment’s strong earnings and cash flow generation to be sustained over the next 12 months.

MARC notes as a longstanding distributor of Caterpillar heavy machinery, mainly in Queensland and Northern Territories in Australia, the group’s industrial division has benefited from the recent mining boom in the country, translating into a 23.2% and 40.9% year-on-year (y-o-y) increase in revenue and operating profits in FY2011. The industrial division’s acquisition of a portion of Bucyrus’ former distribution business from Caterpillar for RM1.1 billion in 4Q2011 is expected to broaden the group’s competitive footprint in the Australian heavy machinery market segment. Meanwhile, the strong performance of the group’s motor division, which had registered robust luxury car sales in Hong Kong, China and Singapore, could see moderation in coming quarters on account of slower economic growth.

In FY2011, the group announced its exit from the oil and gas segment (O&G) with the sale of its fabrication yards in Teluk Ramunia and Pasir Gudang for RM689.5 million. The O&G segment registered significant project cost overruns that had led to losses in the preceding year. MARC believes that the divestment would enable Sime Darby to lower the business risk profile of its energy and utilities (E&U) division. Sime Darby will complete its remaining project, the construction of process platforms for India-based Oil and Natural Gas Corporation (ONGC), scheduled for completion in 4Q2012. Supported by improved performance of its utilities and port operations in China, the E&U division turned around with an operating profit of RM245.7 million in FY2011 (FY2010: -RM687.2 million).

Following a lackluster performance in FY2011, the group’s property division posted a 46.4% increase in its segment operating performance in the first six months of FY2012 (1HFY2012) compared with the prior year corresponding period. The improved performance was driven by higher sales and the completion of a higher percentage of property development works. Sime Darby’s purchase of a 30%-stake in high-end property developer Eastern and Oriental Berhad (E&O) is viewed as largely neutral from a business risk perspective.

For FY2011, holding company’s revenue, which consists mainly of dividend income from subsidiaries rose to about RM2.0 billion (FY2010: RM1.2 billion; FY2009: RM1.3 billion). MARC observes a high concentration of dividend income from Sime Darby’s plantation subsidiary despite the group’s business diversity. The division is expected to remain as the major dividend contributor for the near- to intermediate-term. In MARC’s opinion, Sime Darby’s liquidity is strong with cash and bank balances of RM347 million and availability of RM2.0 billion under the rated facilities against its short-term borrowings of RM1.2 billion (FY2010: RM1.8 billion). Sime Darby’s recent acquisitions of Bucyrus’ distribution assets and the equity stake in E&O have resulted in an increase in its consolidated debt-to-equity ratio, the credit impact of which is currently mitigated by the ample dividend income from its operating subsidiaries relative to its debt service requirements. However, a major acquisition at holding company level or at any of its operating subsidiaries could prompt a reassessment of its ratings.

The stable outlook reflects MARC’s expectations that Sime Darby’s credit metrics will remain in line with its current ratings.

Contacts:
Nisha Fernandez, +603-2082 2269/ nisha@marc.com.my;
Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my.

Silver Bird’s ratings downgraded to D after default

Published on 05 April 2012

RAM Ratings has downgraded the ratings of Silver Bird Group Berhad’s (“SBGB” or “the Group”) RM30 million Commercial Papers/Medium-Term Notes Programme (2005/2012) (“CP/MTN”), from C3/NP to D. Concurrently, the Rating Watch (with a negative outlook) on SBGB has been lifted.

The downgrade is premised on Facility Agent AmInvestment Bank Berhad’s announcement through the Fully Automated System for Issuing/Tendering (or FAST) that SBGB had failed to redeem RM15 million of its outstanding CP/MTN on the scheduled maturity date of 5 April 2012.

On 1 March 2012, RAM Ratings had downgraded SBGB’s ratings from A2/Negative/P2 to C3/RW (Negative)/NP, following defaults on some of its banking facilities and alleged irregularities in the Group’s accounts. At the same time, 3 key personnel (the group managing director, the executive director and a senior member of its management team) had been suspended.

Based on SBGB’s announcement on 2 April 2012, the Group had defaulted on RM45.36 million of banking facilities and is currently communicating with its lenders on various options to regularise the defaults. With the maturity of the CP/MTN, RAM Ratings no longer has any rating obligations on the CP/MTN.

Media contact
Low Pui San
(603) 7628 1051
puisan@ram.com.my

RAM Ratings upgrades Cahya Mata Sarawak’s rating to A1

Published on 05 April 2012

RAM Ratings has upgraded the rating of Cahya Mata Sarawak Berhad’s (“CMS” or “the Group”) RM399.6 million Serial Bonds and the Conditional Payment Obligations (“CPOs”) of the Facilitator Bank (collectively, “the Repackaged CMS Income Securities”), from A2 to A1; the rating has a stable outlook. Under the transaction structure, CMS assumes the risk of non-payment of the CPOs by the Facilitator Bank. The rating of the Repackaged CMS Income Securities is therefore premised on the Group’s credit strength. CMS is involved in cement manufacturing, construction, quarry operations and property development.

The rating upgrade is premised on the sustained improvement in CMS’s financial results over the past 5 years. Backed by its strong market position in Sarawak’s cement-manufacturing sector, revenue increased from RM846.5 million in FYE 31 December 2007 (“FY Dec 2007”) to RM1.0 billion in FY Dec 2011 (unaudited), translating into respective operating profits before depreciation, interest and tax of RM44.5 million and RM195.1 million. The Group’s performance will be further lifted by the acquisition of profitable entities, i.e. CMS Roads Sdn Bhd and CMS Pavement Tech Sdn Bhd in May 2011, along with the benefits from the upgrading of CMS’s integrated cement-manufacturing business.

The better results were also accompanied by stronger debt-protection metrics and a deleveraged balance sheet. Notably, CMS’s gearing ratio eased from 0.38 times as at end-FY Dec 2007 to 0.13 times as at end-FY Dec 2011; its funds from operations (“FFO”) debt coverage surged from 0.03 to 0.91 times over the same period. CMS also boasts a strong liquidity position – featuring RM222.9 million of cash and bank balances and RM516.1 million of investment securities against RM215.8 million of debts as at end-December 2011.

Going forward, the Group’s healthy financial profile is envisaged to remain largely intact. Even after factoring in CMS’s equity injection for its new business venture, i.e. a 20%-stake in a joint venture with OM Holdings Ltd for the production of ferro-alloys (ferro silicon and silico manganese), the Group’s gearing ratio is still envisaged to stay below 0.2 times while its FFO debt coverage should approximate 0.6 times over the next 2 years – considered above-average relative to its similarly rated peers. The rating upgrade also takes into consideration the better showing of the Group’s key divisions, including cement manufacturing and construction, which have outperformed our sensitised-case projections.

CMS recently announced the abortion of its plan to jointly develop a USD2 billion aluminium smelter plant with Rio Tinto Aluminium Ltd. While this will preserve the Group’s coffers, we expect CMS to embark on new projects under the Sarawak Corridor of Renewable Energy and also expand its current operations, albeit at a measured pace. “We believe that CMS’s current robust balance sheet and strong liquidity profile provide sufficient headroom for such initiatives,” notes Shahina Azura Halip, RAM Ratings’ Head of Real Estate and Construction Ratings.

The rating nonetheless, is moderated by the Group’s exposure to geographical-concentration risk as most of its businesses are located in Sarawak. CMS is also susceptible to the cyclical natures of the construction and property sectors.

Media contact
Yong Keck Phin
(603) 7628 1183
keckphin@ram.com.my

RAM Ratings reaffirms Point Zone’s AA3(s)/P1(s) ratings

Published on 04 April 2012

RAM Ratings has reaffirmed the respective long- and short-term ratings of AA3(s) and P1(s) for Point Zone (M) Sdn Bhd’s (Point Zone) RM500 million Islamic Commercial Papers/Medium-Term Notes Programme (2011/2018) (ICP/IMTN); the long-term rating has a stable outlook.

Point Zone is a special-purpose vehicle set up as a wholly owned subsidiary of KPJ Healthcare Berhad (KPJ or the Group) to undertake the issuance of the ICP/IMTN. KPJ is an investment-holding company with subsidiaries involved in the operation of hospitals and the provision of healthcare services. The enhanced issue ratings are based on the credit-risk profile of KPJ, the provider of the unconditional and irrevocable corporate guarantee on the ICP/IMTN.

KPJ’s credit profile is supported by its position as Malaysia’s leading private healthcare provider, its steady operations and cashflow, its strong liquidity profile and financial flexibility, as well as sturdy demand for healthcare services. In FYE 31 December 2011, the Group’s revenue was lifted 14.3% year-on-year to RM1.89 billion – driven by an overall growth in same-hospital revenue, contributions from Sibu Medical Centre and full-year contributions from Tawakkal Hospital’s enlarged capacity (following its relocation to a larger building). KPJ’s profitability had likewise improved, with operating profit before depreciation, interest and tax augmenting 20.1% to RM229.32 million. Meanwhile, the Group’s adjusted funds from operations debt cover (FFODC) strengthened to 0.23 times as at end-December 2011 (end-December 2010: 0.19 times).

Offsetting the above strengths is KPJ’s aggressive expansion, which results in a highly leveraged financial profile. The Group’s lease-adjusted gearing ratio, although improved, was still relatively high at 1.26 times as at end-December 2011 (end-December 2010: 1.40 times). “Looking ahead, KPJ’s adjusted gearing ratio is expected to peak at about 1.5 times over the next 3 years following the expansion of its hospital network. At the same time, we expect its adjusted FFODC to remain at around 0.20–0.25 times. We understand that the Group is constantly on the lookout for growth opportunities and will continue expanding its hospital network. Under the circumstances, we maintain a cautious view on the potential impact that further debt-funded expansion could have on its balance sheet and debt-protection measures,” says Kevin Lim, RAM Ratings’ Head of Consumer and Industrial Ratings.

Elsewhere, KPJ remains exposed to persistent cost increases such as higher staff salaries and more expensive medical supplies and pharmaceuticals. Overall, RAM Ratings does not expect these cost increases to exert overwhelming pressure on the Group’s financial profile at this juncture, as the lack of a standardised fee schedule for pharmaceuticals and medical supplies charged by private hospitals allows for some pricing flexibility. Nevertheless, we note that the healthcare industry and KPJ are still subject to regulatory controls, which may evolve over time. The Ministry of Health is looking to implement a new healthcare system (1Care) for Malaysians, which could well change the landscape of the industry. Following its implementation, public and private hospitals may be integrated under a common network. Should a standardised fee schedule be imposed, KPJ’s profitability may be affected if operating costs are not effectively managed. That said, details of the scheme have yet to be finalised. As such, the impact of such a restructuring, including its effect on KPJ’s competitive position, can only be assessed upon more clarity of the said scheme.

Media contact
Low Su Lin
(603) 7628 1071
sulin@ram.com.my

MARC WITHDRAWS RUN HOLDING SPV BHD’S DEBT RATING UPON FULL REDEMPTION OF OUTSTANDING NOTES UNDER RM500 MILLION CP/MTN PROGRAMME

Apr 3, 2012 -

MARC has withdrawn its MARC-4/BB+ ratings on RUN Holding SPV Bhd’s (RUNH) RM500.0 million Commercial Papers/Medium Term Notes (CP/MTN) Programme with immediate effect. The ratings withdrawal follows the full redemption of outstanding RM120 million on November 25, 2011 and cancellation of the facility, as confirmed by the security agent, UOB (Malaysia) Berhad.

Contacts:
David Lee, +603-2082 2255/ david@marc.com.my;
Sandeep Bhattacharya, +603-2082 2247/ sandeep@marc.com.my.

MARC REVISES OUTLOOK TO NEGATIVE ON MISC BERHAD’S ISLAMIC DEBT PROGRAMMES; AFFIRMS RATINGS

Apr 3, 2012 -
MARC has affirmed its ratings on MISC Berhad's (MISC) RM2.5 billion Islamic Medium Term Notes (IMTN) and RM1.0 billion Murabahah Commercial Papers/Medium Term Notes (MCP/MTN) Programmes at AAAID and MARC-1ID /AAAID respectively and revised the outlook to negative from stable. The rating action affects RM2.25 billion of outstanding notes under the rated programmes.

The outlook revision follows the company’s recent release of its unaudited results for the last nine months of 2011, which indicated earnings pressure, declining interest coverage, increased debt leverage and persistent negative free cash flow. The shipping company posted a sharply reduced operating profit of RM599.4 million and a pre-tax loss of RM1.2 billion for the nine month period after accounting for impairment and provision on exit of liner business operations. MARC does not expect significant improvement in the operating environment of MISC’s chemical and petroleum shipping segments over the next 12 to 18 months which, in combination with its heavy capital spending, could delay improvement in its financial performance and credit measures.

The affirmed ratings continue to incorporate support-driven uplift associated with high parental support expectations in view of MISC’s moderately high operational integration with its parent and past demonstrated financial support from Petroliam Nasional Berhad (Petronas). MARC views MISC as a captive provider of LNG shipping services and offshore floating solutions to the national oil company, and believes that a high level of financial support will continue to be available to the shipping company. Hence, MARC views the high expected parental support from Petronas (rated AAA/Stable on the basis of public information) as an important offset to the recent erosion in MISC’s standalone credit protection metrics. The affirmed ratings also incorporate the predictable and stable earnings and cash flow generation capacity of MISC’s LNG and offshore segments, which in aggregate contributed nearly 30% of group revenue and RM1.3 billion in pre-tax profits for the last nine months of 2011.

MISC is an integrated maritime, offshore floating solutions, heavy engineering and logistic services provider, and is listed among the top five largest shipping conglomerates in the world by market capitalisation. Its business activities are energy-related shipping (LNG, petroleum and chemical), other energy related business (offshore, heavy engineering and tank terminal) and integrated liner logistics. As at December 31, 2011, the group operates a fleet of 169 vessels and 12 offshore floating facilities, of which nearly 70% of the vessels are owned by the group.
Overcapacity and weak industry conditions in the global shipping industry have led to MISC's liner, chemical and petroleum shipping segments recording cumulative pre-tax losses of RM3.8 billion over the last five quarters ending December 31, 2011. On November 24, 2011, MISC announced that it would exit from the container shipping business by shutting down its operations and disposing the vessels. MISC made a one off provision amounting to RM1.4 billion in relation to its planned exit from the liner business, which had contributed significantly to its nine month pre-tax loss of RM1.2 billion. MARC views the move as positive for MISC's business and financial risk profile in light of the losses incurred by the business in the last three financial years and the weak prospects for recovery in the liner market in the near term. The exit from the liner business will also align MISC's business profile more closely to that of its parent company. The exercise is expected to be completed by end-June 2012.

MISC's free cash flow (FCF) has been consistently negative. MARC believes that the company’s significant committed capital expenditure of RM3.2 billion will keep FCF negative in 2012. Its capital spending needs and fairly high short-term debt of RM5.9 billion against cash balance of RM4.2 billion as at December 31, 2011, suggest that the shipping company would need to reassess its liquidity management policies to augment its internal cash flow generation and balance sheet liquidity gap over the next 12 to 18 months through efforts which amongst others could include extending the maturing short-term debts into long-term debts and/or asset monetisation. While MARC expects MISC’s access to funding sources to remain favourable, any substantial incremental debt would pressure the group’s leverage metrics and take its debt-to-equity ratio, beyond the current five-year high of 0.64 times (x) as at December 31, 2011.

In the last nine months of 2011, the group recorded a year-on-year decline in revenue of 9.5% to RM8.5 billion (9M2010: RM9.4 billion) and pre-tax loss of RM1.2 billion (9M2010: pre-tax profit of RM2.5 billion). The loss was mainly attributable to impairment provisions of RM293.4 million and aforementioned provisions related to the group's exit from the liner business. Excluding these provisions, the group would have reported profits, although significantly lower than that for the preceding year corresponding period. Cash flow from operations (CFO) for the nine month period was RM1.0 billion, resulting in weaker CFO interest and debt coverage ratios of 3.9x and 0.05x (12 months ended March 31, 2011: 5.4x and 0.16x respectively). Compared to the preceding year corresponding period, the rating agency noted that FCF deficit was smaller despite the lower CFO, chiefly as a result of reduced capital expenditure and dividends.

A downgrade in MISC’s long-term debt rating could occur over the next 12-18 months if further erosion of MISC’s credit metrics and financial flexibility were to occur with no near-term prospects for recovery, and/or MARC perceives a weakening of parental support. The rating outlook could revert to stable if MISC’s debt protection ratios strengthen as a result of sustainable improvements in its financial performance and operational cash flows, and/or capital infusion which MARC views as unlikely in the near-term.

Contacts:
Sabesh Parameswaran, +603-2082 2260/ sabesh@marc.com.my;
Francis Xaviour Joe, +603-2082 2279/ fxjoe@marc.com.my.

MARC AFFIRMS ITS AAAID AND MARC-2ID(CG)/A-ID(CG) RATINGS ON KWANTAS SPV SDN BHD’S RM155 MILLION SUKUK IJARAH AND RM65.0 MILLION MURABAHAH CP/MTN PROGRAMME

Apr 2, 2012 -

MARC has affirmed its AAAID rating on Kwantas SPV Sdn Bhd’s (Kwantas SPV) outstanding RM60 million Class A sukuk with a stable outlook. Concurrently, MARC has also affirmed its ratings on Kwantas SPV’s RM65 million Murabahah Commercial Papers/Medium Term Notes (CP/MTN) Programme at MARC-2ID(cg)/A-ID(cg). The rating outlook on the Murabahah CP/MTN Programme has been revised to stable from negative.

The rating of the Class A sukuk reflects the strong collateral backing for sukukholders, and a marginal decline in net operating income (NOI) in the 12 months to June 30, 2011 (FY2011) as a result of reduced fresh fruit bunches (FFB) production and higher operating expenses. Nonetheless, the NOI of the securitised estates remain within MARC’s expectations and should comfortably amortise the outstanding sukuk over its remaining term. The stable outlook incorporates the rating agency’s expectation of gradually declining FFB output with over 70% of the securitised estates’ palms in the past prime bracket, balanced against a supportive pricing environment for palm oil. Meanwhile, the ratings on the Murabahah CP/MTN Programme mirror the corporate credit ratings of Kwantas Corporation Berhad (KCB) as the guarantor of the notes. The affirmed ratings and revised outlook to stable reflect the improvement in KCB’s financial metrics following the temporary cessation of its downstream oil palm operations in Guangzhou, China. With the full redemption of the Class B and Class C sukuk, Murabahah CP/MTN noteholders now have a priority charge over the securitised plantation assets which rank immediately after Class A sukukholders.

MARC has revised the value of the securitised estates to RM315.0 million, 23.7% higher than MARC’s prior year cashflow valuation. The loan-to-value (LTV) ratio of 18.9% for Class A sukuk following the redemption of the first RM20.0 million instalment in May, 2011 provides strong collateral backing for the sukuk.

In August 2011, the total matured area of securitised estates remains at 8,101 hectares (ha) with 72.1% of the area falling within the past-prime age bracket. MARC expects FFB production to gradually decrease through the remaining three year term of sukuk. MARC also estimates that half of the planted area of the securitised estates would require replanting. Nevertheless, the planned capital expenditure for the replanting is expected to take place only after the final redemption of Kwantas SPV’s rated obligations.

The average FFB yield of the securitised estates fell to 21.6 metric tonnes per hectare (MT/ha) (FY2010: 23.7MT/ha) due to rainy season during the first six months of the financial year ending June 30, 2011 (1HFY2011) which affected the palm oil industry in Sabah. However, Kwantas SPV’s average FFB yield outperformed the Sabah state and Malaysia industry by 1.0 MT/ha and 3.2 MT/ha respectively. Furthermore, actual NOI from the securitised estates decreased marginally to RM48.0 million (FY2010: RM49.9 million), although the average FFB prices increased to RM672 per MT (FY2010: RM459 per MT). This is mainly due to higher labour costs for field maintenance and windfall tax charges on higher CPO prices.

KCB’s standalone credit profile has improved since MARC’s last rating action. In FY2011, KCB’s revenue increased to RM1,251.1 million (FY2010: RM1,248.2 million) and its pre-tax profit increased significantly to RM144.6 million (FY2010: RM5.2 million) largely due to sale of its land bank in Sarawak. KCB divested its 70%-owned subsidiary, Green Ace Resources Sdn Bhd, and 5,206 hectares of leasehold land in Sarawak in FY2011 for a total consideration of RM52.4 million to improve its liquidity. MARC regards KCB’s free cash flow generation as sensitive to the timing and magnitude of its replanting expenditure. The stable outlook on KCB’s corporate credit rating incorporates MARC’s expectation of prudent cash flow and liquidity management as well as the satisfactory cash flow generation from its matured plantations in Sabah.

Contacts:
Ahmad Tajuddin Yeop Aznan, +603-2082 2255/ tajuddin@marc.com.my ;
Jason Kok, +603-2082 2258/ jason@marc.com.my ;
Sandeep Bhattacharya, +603-2082 2247/ sandeep@marc.com.my .

MARC REMOVES MAXTRAL INDUSTRY BERHAD’S BaIDS RATING FROM MARCWATCH NEGATIVE; WITHDRAWS RATING

Mar 30, 2012 - MARC has removed its BBID rating on Maxtral Industry Berhad’s (Maxtral) RM80.0 million Al-Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) from MARCWatch Negative and has withdrawn the rating with immediate effect following the full redemption of the outstanding notes as confirmed by the facility agent, OSK Investment Bank Berhad. MARC’s rating coverage on Maxtral is now only limited to its MARC-4ID/BBID rated RM10.0 million outstanding Murabahah Underwritten Notes Issuance/Murabahah Medium Term Notes (MUNIF/IMTN) programme, which remains on MARCWatch Negative. MARC will continue to monitor the progress of Maxtral’s refinancing of the outstanding notes, which are due for repayment on April 18, 2012. Contacts: Goh Shu Yuan, +603-2082 2269/ shuyuan@marc.com.my; Francis Xaviour Joe, +603-2082 2279/ fxjoe@marc.com.my.