Nam Fatt Corporation Bhd - 2007

MARC has reaffirmed Nam Fatt Corporation Berhad’s (Nam Fatt) ratings for its RM250  million  Islamic  Commercial   Paper/Islamic   Medium  Term  Notes  Programme  (ICP/IMTN)  at MARC-1ID /A+ID. The outlook for the ratings has been revised to developing from stable. The ratings are predicated on the facility’s tight issue structure which confines the utilization of draw downs under the facility to the financing of working capital requirements for specific contracts or projects, ensures that only contracts or projects with creditworthy counterparties can be financed, limits the margin of advance to 85% of the value of the contract to be financed, and ringfences the cashflows from the receivables for the benefit of noteholders. The ratings reflect the blended risk of Nam Fatt’s performance risk on the projects as a contractor, which MARC has assessed as moderate, and the low settlement risk on the receivables under the financed contracts. The developing outlook on the ratings reflects the measures that management has put in place to counter the decline in its cash flow and credit protection measures.

Nam Fatt’s cash flow measures and working capital position are under considerable pressure as a result of its continuing negative cash flows since FY2006 and increased receivables collection days. MARC’s concerns on the latter relate to the group’s earnings quality as resolution of a significant portion of outstanding receivables will be protracted, notably Nam Fatt’s variation order claims for its Sudan Melut Basin project. The group has put in place some measures to address the foregoing concerns and expects to reverse its negative operating cash flows by 3Q2007. The developing outlook reflects that while MARC believes that the recent remedial initiatives of Nam Fatt have the potential to improve its financial profile, meaningful improvements over the near term will have to be demonstrated to counter downward rating pressures.

Nam Fatt, which is listed on the Main Board of Bursa Malaysia, is primarily involved in construction & engineering and property development. As at 31 March 2007, the Group’s outstanding order book stood at approximately RM1,082.0 million, significantly enhanced by the recently secured KIC Petroleum Terminal project worth RM550 million. Domestic projects make up 75% of the Group’s outstanding order book while offshore projects account for the remainder.

Nam Fatt has established a track-record for the timely execution of its projects, demonstrated an ability to replenish its order book and has managed counterparty credit risk exposures. Based on its current outstanding order book, MARC expects that Nam Fatt will continue to follow a volume-led strategy in the short to medium term. Although this could result in lower operating margins, this strategy would enable better utilization of its existing assets, in addition to producing higher EBIT levels. The above positives are however tempered to a certain extent by increasing competition within the construction sector and consequent margin pressure.

The group’s improved profitability in FY2006 is attributable to the better performance of its property division, which offset the weaker performance of its energy and construction (EPCC) division, as represented by its operating margins of 8.2% (FY2005: 4.4%). However, this was moderated by the hefty increase in receivables and amounts due from contract customers.

Although Nam Fatt’s near-term debt service obligations appear manageable, the group’s increasing working capital requirements could continue to strain its cash flows. Liquidity is mitigated somewhat by Nam Fatt’s cash balances, unutilized banking lines, and access to the loan/bond market. Notwithstanding the structural protections, noteholders are not insulated from performance risk of the Group, which continues to be a key rating driver for the notes.