MARC has downgraded the rating of Ace Polymers (M) Sdn Bhd’s (Ace) RM70 million Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) from A ID to A-ID with a stable outlook. The rating downgrade is underpinned by the prevailing automotive outlook reflecting deteriorating industry fundamentals and possible negative effects on Ace’s future operating and financial performance, particularly as a large portion of its revenues is dependent on the sales performance of national cars. Industry fundamentals have become more challenging as a result of increasingly stringent approval requirements for hire purchase loans and relatively higher interest rates for used vehicles financing, aggravated by depressed used car prices and generally negative consumer sentiment arising from higher energy/crude oil prices. Nonetheless, the rating is supported by Ace’s status as a Tier-One supplier to the local automotive industry, its improved financial profile and an issue structure that prioritizes payments relating to the BaIDS over operating expenses.

Ace produces and supplies plastic-based modules/components (including bumpers, instrument panels and grilles radiators) to PROTON, PERODUA and Naza Automotive Manufacturing Sdn. Bhd. (NAM). PROTON remains the Ace Group’s biggest customer, accounting almost half of its total sales. While Ace’s historical performance have been strong, its earnings and profitability over the medium term are expected to experience an adverse impact due to its heavy reliance on the domestic-based automakers.

In FY2005, Ace registered growth of 15.7% and 21.7% in revenue and pre-tax profit respectively. In view of higher accumulated retained earnings that outpaced the increase in borrowings, Ace’s debt leverage reduced to 1.31 times (FY2004: 1.60 times). The Group’s borrowings as at end-December 2005 totalled RM84.6 million (FY2004: RM71.0 million). Ace’s debt service coverage ratio (DSCR) strengthened to 12.9 times following improvement in its receivables collection during the year which resulted in a better operating cash flow. It is noted that bulk of Ace’s receivables are attributed to PROTON, which accounted for 53.3%, followed by NAM at 44.6% of its total receivables in FY2005. Notwithstanding, BaIDSholders can draw comfort based on the priority of payment for the BaIDS redemptions which rank above all other payments as stipulated in the issue structure.