RAM Ratings has assigned respective long- and short-term ratings of AAA(fg) and P1 to Poh Kong Holdings Berhad's ("Poh Kong" or "the Group") proposed RM150 million Danajamin-Guaranteed Islamic Commercial Papers/Islamic Medium-Term Notes Programme (2011/2018) ("ICP/IMTN"). Concurrently, the A1/P1 ratings of Poh Kong's RM200 million Murabahah Commercial Papers/Medium-Term Notes Programme (2006/2013) ("CP/MTN") have been reaffirmed. Both long-term ratings have a stable outlook.
The AAA(fg) rating of the proposed ICP/IMTN reflects the unconditional and irrevocable guarantee extended by Danajamin Nasional Berhad ("Danajamin", AAA/Stable/P1), which enhances the credit profile of the debt issue beyond Poh Kong's inherent or stand-alone credit strength.
On the other hand, the A1/P1 ratings reflect Poh Kong's stand-alone credit profile, which is mainly supported by its established reputation and position as Malaysia's largest jewellery retail chain. The Group operated 98 retail outlets as at end-July 2011. The ratings also take into account Poh Kong's healthy balance sheet and favourable cashflow-protection metrics. Meanwhile, the Group's liquidity profile is enhanced by its gold inventory, which is considered liquid and valuable.
However, the ratings are moderated by Poh Kong's vulnerability to volatile gold prices and the Group's hefty working-capital needs. It is also exposed to market competition vis-à-vis fast-changing industry trends and customers' sensitivity to movements in gold prices. Nevertheless, demand for yellow gold is expected to remain resilient over the long term given its universally recognised value and Malaysians' view of yellow gold jewellery as a customary gift on special occasions.
Spurred by its 35th anniversary promotions and stronger sales of gold bars amid the commodity's escalating prices, Poh Kong's revenue and operating profit before depreciation, interest and tax climbed up a respective 23.4% and 21.0% y-o-y in FY July 2011. Although the Group's debt level increased to RM167.88 million, its gearing ratio eased from 0.49 to 0.48 times as at end-July 2011, supported by enlarged retained profits. Meanwhile, the Group's better performance slightly improved its funds from operations debt coverage ("FFODC"), from 0.34 to 0.35 times. However, its operating cashflow debt coverage ("OCFDC") ratio thinned from 0.19 to 0.09 times on the back of inventory build-up for its 35th anniversary sales and the opening of 5 new outlets.
"Even factoring in additional borrowings for capital expenditure, Poh Kong's gearing ratio is still expected to remain moderate at about 0.55 times. We also envisage its FFODC to hover around 0.3 times over the next few years, with an OCFDC of approximately 0.1 times," points out Kevin Lim, RAM Ratings' Head of Consumer & Industrial Ratings.
We highlight that the CP/MTN is not underwritten; the principal terms and conditions of the debt facility stipulate that subsequent issuances are subject to Poh Kong maintaining minimum ratings of A2/P1. In the event of a rating downgrade, the Group may not be able to draw down further on this facility. RAM Ratings highlights that Poh Kong's ratings do not reflect this risk. Meanwhile, the IMTN portion of the proposed Danajamin-Guaranteed ICP/IMTN will also not be underwritten. However, the ICP may be underwritten if Poh Kong and the joint lead arrangers can come to an agreement on its terms and conditions, including the participation rate and underwriting fees.
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Media contact
Low Li May
(603) 7628 1175
limay@ram.com.my
© Press Release 2011
