MARC has affirmed the rating of MARC-2/A- with stable outlook to Equine Capital Berhad’s (ECB or Issuer) Commercial Papers/Medium Term Notes Programme (CP/MTN Programme) of up to RM95 million. The rating reflects ECB’s high competitive position through its flagship developments in Seri Kembangan, credible track record of timely completion of its projects and low debt leverage position. Moderating factors would be the cyclical nature of the property industry attributed to interest rate rise, rising cost of building components and also the company’s declining cash flow from operations.

ECB is an integrated group of companies principally involved in property development. Its flagship development comprises of Taman Equine, Putra Permai and Pusat Bandar Putra Permai which collectively forms the back bone of Bandar Putra Permai. Located at Seri Kembangan, a growth region within the Multimedia Super Corridor, these developments have to- date recorded high take-up rates. ECB’s future development thrust will continue to be its Seri Kembangan developments with contributions from two additional developments in Cheras. The existing developments in Seri Kembangan are expected to sustain ECB’s revenue base for the next five to six years.

The group’s revenue dropped by 6% for FY2006 compared to FY2005 from RM140 million to RM131 million mainly due to the lower recognition of its Taman Megah Jaya and Taman Mestika projects. Nevertheless, gross profit margin showed a significant improvement of 34% for FY2006 compared to 24% for FY2005 contributed by its shop lots units and semi-detached houses in Pusat Bandar Putra Permai which command a higher margin. Despite the improvement in the gross margin, net profit for the year showed a 45% drop compared to FY2005. The results for FY2005 was augmented by the share of results of its associated company, Pharmaniaga Logistics Sdn Bhd (PLSB), of RM11.6 million and a gain on disposal of PLSB of RM10.9 million which was completed in 2005. OPBIT interest coverage has shown an improvement with coverage of 12.14x for FY2006 compared to 6.7x for FY2005 which was backed by lower interest expense during the year.

The group’s cash flow from operation deteriorated further with a deficit of RM30 million in FY2006 compared to a deficit of RM2.0 million for FY2005. The deterioration of the cash flow position was mainly due to the outstanding receivables amounting to RM 24.0 million. In tandem with the increase in net cash deficit operations, CFO interest coverage also showed a decrease with a deficit coverage of 1.54x compared to a favourable coverage of 0.78x for FY2005. Correspondingly, CFO debt coverage deteriorated further due to higher short term borrowings and amplified by deficit in cash flow from operation for the year under review.

Although the group’s debt leverage increased to 0.45x for FY2006 compared to 0.31x for FY2005 due to the drawdown of the Commercial Paper/Medium Term Notes of RM95 million was used to fast track the progress of its development in Seri Kembangan as well as for working capital purposes. Nevertheless, the group debt leverage position is still well below the covenanted level of 1.75x.

Going forward, property market environment is anticipated to be more competitive with rising fuel prices, interest rates and material costs. However, based on ECB’s competitive pricing and high take up rates historically, ECB’s future sales of its property developments are expected to remain favourable. MARC also foresees that the group will retain its current land bank for further developments; particularly its land bank in Taman Equine and Pusat Bandar Putra Permai which are anticipated to continue generating encouraging demand, which in turn will enhance ECB’s bottom line.