Equine Capital Bhd - 2007

MARC has reaffirmed the ratings of MARC-2/A- to Equine Capital Berhad’s (ECB) Commercial Papers/Medium Term Notes Programme (CP/MTN Programme) of up to RM95 million with a developing outlook. The rating affirmation reflects MARC’s expectations of improvements in ECB’s operating and financial performance, supported by generally positive broad housing market trends and ECB’s planned launches in its flagship developments in Seri Kembangan. Despite ECB’s weaker performance in FY2007 and the increasing amount of funds tied up in receivables, the group was able to generate free cash flow in FY07 and preserve its moderately leveraged financial profile. MARC has also revised the outlook for ECB’s rating from stable to developing. The revised outlook reflects ECB’s proposed plan of refinancing the existing bonds with a term loan facility amounting to RM75 million. The exercise is expected to be completed by the end of the year.

ECB is principally involved in property development and its earnings are currently predominantly derived from its flagship development which comprised Taman Equine, Putra Permai and Pusat Bandar Putra Permai. In FY07, ECB ventured into property investment as represented by its 20-acres Driv-tru Mall, a commercial precinct in Seri Kembangan. The investment properties are expected to provide long term sustainable rental income for the group. ECB’s business risk profile was further boosted during the year with the acquisition of Penaga Pesona Sdn Bhd from its associated company, Abad Naluri Sdn Bhd (ANSB).  The wholly owned subsidiary is undertaking a 450 acres mixed development project named ‘Crescentia Park’ in Batu Kawan, Penang, a 15 year project carrying an estimated gross development value of RM860 million.

In FY07, the Group recorded a significant decline in its revenue to RM75 million from RM130 million in FY06. ECB deferred most its launches, in response to the weak housing demand. Operating margin in FY07 declined sharply to 13% as compared to 22% in the previous year. Notwithstanding ECB’s poorer earnings performance in FY07, ECB’s unbilled sales stood approximately RM150 million as at 31 March 2007. Based on the group’s development schedule, revenue is expected to recover from FY2007 levels with new launches from Pusat Bandar Putra Permai, Taman Equine, Cheras and Batu Kawan.

Credit protection measures were weak for the current ratings despite the slight improvement in the debt service coverage ratios. Historically, ECB’s funds from operations exhibit limited stability and predictability. On the other hand, the group posted a surplus in free cash flow due to its positive working capital movement, higher interest income, lower taxation and capital expenditure requirement.

ECB’s debt leverage has been maintained in the last two years, as evidenced by its debt to equity ratio of 0.44 times in FY07 against 0.45 times in the previous year. The group has moderate financial flexibility with RM17 million of unutilised credit facilities as at 31 March 2007.