Prinsiptek Corporation Bhd - 2007

Major Rating Factors

Strengths

• Proven track record in housing construction;
• Order book provides good revenue visibility; and
• Increased geographic diversity of construction revenue.

Challenges/Risks:

• Cyclical nature of construction and property development industry;
• Extremely competitive industry conditions;
• Slow payment of receivables is affecting liquidity and cash flow; and
• Modest level of financial flexibility.  

MARC has reaffirmed the ratings of MARC-2ID /A- ID for Prinsiptek Corporation Berhad’s (“Prinsiptek”) Murabahah Commercial Papers ( “MCPs”) Programme of up to RM30 million and Murabahah Medium Term Notes (“MMTNs”) Programme of up to RM50 million. The ratings reflect the company's proven track record in its execution of projects, and reasonably strong order book of over RM401.5 million as at end March 2007, coupled with potential new construction contracts of over RM600.0 million and future property developments with a gross development value of RM355.0 million. Moderating the rating are the company’s limited financial flexibility arising from its low unrestricted cash balances, which will hinder the company’s ability to undertake more projects and customer concentration in Prinsiptek’s core business of construction, with four turnkey contracts accounting for up to 69.7% (RM111.5 million) of total trade receivables as at end-FY2006. Additionally, Prinsiptek, like other industry players, continues to be exposed to upward movements in building material prices (i.e. rising cement and steel prices) that could exert pressure on margins. The ratings carry a negative outlook. 

Prinsiptek is a public listed company involved in building construction, property development and the trading of building materials. Housing construction projects have been the mainstay of Prinsiptek’s contracting services since the late nineties. To complement its construction activities, the Group ventured into property development, albeit on a much smaller scale. The Group has also ventured abroad in pursuit of foreign construction projects to sustain its order book. Prinsiptek is presently undertaking a housing construction contract in Bangkok, Thailand worth approximately RM194 million awarded by the National Housing Authority of Thailand and is securing another joint venture on a mixed development project at the same location.

In FY2006, Prinsiptek’s revenue increased marginally to RM316.4 million (FY2005: RM305.6 million) while its pre-tax profit decreased to RM26.5 million (FY2005: RM28.2 million). During the year, 84.8% of the revenue was generated by the construction division, the main driver for the group. The property division contributed a nominal 8.6% of the total revenue. After having recorded negative cashflow from operations (“CFO”) for two consecutive years, Prinsiptek’s net CFO turned positive (RM19.0 million) in FY2006. More effective management of receivables continues to be a prerequisite to any improvement in the Group’s liquidity position and financial flexibility. MARC also recognises an urgent need for new equity capital to bolster the Group’s balance sheet and competitive strength in the context of its challenging operating environment.

The rating outlook remains negative on account of the modest improvement in recent cash flow associated protection measures as well as the uncertain implications of Prinsiptek’s geographic diversification strategy on the group’s business and financial profiles. If the Group succeeds in generating a material improvement in its profitability and cash flow measures, the outlook will be revised to stable from negative.