MARC has reaffirmed the corporate debt rating of KFC Holdings (Malaysia) Bhd’s (KFCH) RM300 million Islamic Notes Issuance Facility (INIF) at A+ID with a positive outlook. The reaffirmation reflects the Group’s strong brand presence in the Quick Service Restaurant (QSR) industry; strong franchise and market dominance; improving financial performance recorded over the years; and strong cash generation ability derived mainly from the nature of its cash business. The rating, however, is moderated by the risk profile of the food-related industry characterized by strong competition and vulnerability to economic factors.

The KFCH Group is primarily engaged in the fast food industry under the international trademark of KFC and home brand Ayamas. It holds the KFC franchise in Malaysia, Brunei and Singapore. Besides the above, KFCH is also a fully integrated food operator, managing its own feedmill, breeder farms, hatchery, contract broiler farms, poultry processing plants, sauce manufacturing plant and retail chains.

As at end 2006, KFCH is by far the largest western QSR group with over 46% of brand share nationwide. The Group’s extensive network coverage comprises a total of 443 KFC outlets and 34 Ayamas outlets located in Malaysia, Brunei and Singapore. Aggressive marketing strategies marked by continuous new product launches and promotions, have enabled the Group to stay ahead of its competitors.

Based on the unaudited results for 31 December 2006 of KFCH, the Group`s revenue continued its strong growth of approximately 5% for FY 2006 at RM1.52 billion versus prior year of RM1.46 billion. Notwithstanding a revenue growth of approximately 5%, the Group has managed to record an increase in operating profit of approximately 7% ie RM158 million for FY 2006 versus RM148 million for FY 2005. The reported net loss of RM30.7 million in 2005 includes a one-off impairment losses on properties and certain business assets totalling RM112 million. The continued improvement in the results was primarily from its continuing strategy of network expansion, its effective KFC marketing programs, tighter cost control and turnaround in its KFC Singapore operations.

Despite lower cash generated from the operations in year 2006 compared to year 2005, the group generated sufficient free cash flow to cover its debt repayment which amounted to RM60 million of the bonds. The group has recently redeemed Tranche F of the INIF facility amounting to RM30 million in January 2007 which leaves the group a balance outstanding of RM35 million to be repaid in year 2007 and year 2008. Based on their strong net cash generative ability and conservative capital expenditure requirement for the last few years, MARC believes that, coverages for debt service will remain adequate for the current rating.

With redemption of RM60 million during the year, the group’s debt to equity ratio dropped significantly from 0.63 times to 0.37 times as at the end of FY2006. The gearing level is expected to fall further with recent redemption of Tranche F amounting to RM30 million in Jan 2007. Taking into account of the Tranche F redemption, the estimated pro-forma debt to equity ratio is 0.32 times.

With the tussle for control of QSR Brands Bhd, single largest shareholder of KFCH, ended, and the entry of Kulim (M) Berhad as the controlling shareholder, greater stability in the business direction of the group is expected. KFCH’s core business of fast food retailing will serve as a stable anchor for its credit quality for as long as KFCH’s franchise agreement with Yum! International remains intact.