24 November 2015

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 Islamic Commercial Papers/Islamic Medium-Term Notes Programme (2011/2018) (ICP/IMTN). The enhanced long-term rating reflects an 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.

While the financial guarantee also extends to the ICP, the P1 rating, which mirrors Poh Kong's stand-alone credit profile, has been reaffirmed. The Group had a relatively flat performance in FY Jul 2015 on the back of an almost flat sales volume. Owing to lower debt levels, Poh Kong's key financial metrics have improved and are expected to broadly remain within our expectations. However, we envisage the year to be operationally challenging for the Group especially after domestic consumer sentiment has fallen to a 6 year low in 3Q 2015 after experiencing 4 consecutive quarters of contraction (according to Malaysian Institute of Economic Research's Consumer Sentiment Index). Furthermore, the depreciation in the Ringgit has impacted affordability, hence given that jewellery is broadly a discretionary item, sales are anticipated to soften.

Poh Kong's stand-alone credit strength lies in its established reputation and strong market position and, healthy balance sheet and adequate debt coverage. Also, the Group's liquidity profile is enhanced by its gold inventory, which is considered liquid and valuable. "Sales had fluctuated throughout the year, with 2Q and 3Q benefitting from pre-GST purchases and 4Q adversely impacted by slower demand post-GST," said Kevin Lim, RAM's Head of Consumer and Industrial Ratings. Poh Kong's operating profit before depreciation, interest and tax margin crept up from 8.1% to 8.2%, underscored by less volatile gold prices and lighter operating expenses after the closure of 13 unprofitable stores.

Subsequent to the closure of 13 unprofitable outlets, the Group's debt level had fallen to RM229.69 million as at end-July 2015 (end-July 2014: RM300.57 million) as it repaid banker's acceptances (RM71 million) in line with lower inventory levels. As a result, its adjusted gearing ratio improved y-o-y to 0.56 times from 0.74 times. Meanwhile, the Group's debt-protection metrics were adequate, with adjusted funds from operations (FFO) debt coverage increasing to 0.24 times from 0.19 times.

"Moving forward, a lighter debt load would lead to an expected adjusted FFO debt cover of about 0.20-0.25 times, barring any wild fluctuation in the price of gold," adds Lim. While the Group is anticipated to continue to expand its retail network, with each outlet requiring renovation and inventory purchases amounting to around RM3 million-RM5 million, its adjusted gearing ratio is not envisaged to exceed 0.6 times.

Poh Kong's credit profile continues to be moderated by its vulnerability to volatile gold prices. The Group remains susceptible to sharp declines in the price of gold, notwithstanding the retail mark-up on yellow gold which had to some extent buffered its profitability against gold-price volatility over the years. In addition, Poh Kong's working-capital requirements are hefty, attributable to its long inventory cycle and the build-up of requisite inventory for its wide and expanding retail network. The Group's exposure to customer sensitivity to movements in gold prices within a competitive and trend-driven industry is another key moderating factor.

-Ends-

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

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