Delloyd Ventures Bhd - 2007

Major Rating Factors

Strengths

• Tier One auto parts vendor with wide product range for national and foreign marques;
• Increased regional presence, particularly in Thailand and Indian markets; and
• Low gearing with sizeable unutilized banking facilities.

Challenges/Risks

• Heavy reliance on sales of national automakers, PROTON and PERODUA;
• Stiff competition in the domestic automotive industry, and consequent pressures on pricing and margin; and
• Execution risk in regards to turnaround plan/rehabilitation of recently acquired Indonesian plantations which have a history of underperformance.

Rationale            MARC has downgraded the long term rating of Delloyd Ventures Berhad (“Delloyd” or “the Group”) from A+ID to AID, whilst maintaining the short term rating at MARC-1ID in respect of its RM100 million Islamic Commercial Papers/Medium term Notes (ICP/MTN) Programme. The rating carries a developing outlook. The downgrade of Delloyd’s long term rating reflects deteriorating local automotive industry fundamentals which have negatively impacted Delloyd’s operating and financial performance, particularly as a large portion of its revenues depend on the sales performance of PROTON Holdings Berhad (PROTON). The rating is supported by Delloyd’s status as a Tier-One auto parts vendor for national carmakers, PROTON and Perusahaan Otomobil Kedua Sdn Bhd (PERODUA), strong liquidity position and its relatively low debt leverage. The developing outlook reflects the downward pressure on the ratings exerted by difficult local automotive industry conditions and the potential for its oil palm businesses to offset some of these pressures.

Delloyd diversified into oil palm through the acquisition of 1,449 hectare (ha) Sungai Rambai Estate in Kuala Selangor in 1999. In July 2006, Delloyd acquired 60% stake in PT Rebinmas Jaya (PTR) funded via the issuance of RM50 million ICP/MTN. PTR owns, operates and manages three oil palm plantations in Pulau Belitung, Sumatera with a total hectarage of 14,422 ha. Contribution from PTR is presently minimal due to the legacy issues relating to poor estate management and maintenance. Delloyd has initiated major rehabilitation of PTR’s estates since late 2006, which will involve an outlay of around RM40 million over the next four years. Going forward, revenue contribution from PTR is estimated to be around 16% of the Group’s total revenue.

As a Tier-One auto parts vendor, Delloyd produces and supplies over 40 automotive products/parts to PROTON, PERODUA, Assembly Services Sdn Bhd, Oriental-Hyundai Sdn Bhd, and Naza Kia Sdn Bhd. The Group has also widened its presence in the regional market through its operations in Indonesia and Thailand. Although overseas’ operations contributed less than 10% of the Group’s revenue in FY2006, overseas contributions are expected to increase following its success in securing more contracts from General Motors in Thailand and India. 

Delloyd’s revenue in FY2006 decreased by 33.2%, whilst its operating margin declined to 5.8% as a result of sluggish sales of national cars. For the nine months ended September 30, 2007 (3QFY07), the Group’s revenue and pre-tax profit were also lower by 2.4% and 48.8% compared to the corresponding period a year ago. Delloyd’s debt servicing capacity is supported by the Group’s cash and bank balances totalling RM8.2 million as at 30 September 2007 and substantial undrawn banking facilities. Delloyd’s gearing ratio stood at 0.20 times as of 3QFY07. Under the terms and conditions of the CP/MTN, Delloyd’s gearing is capped at one time.

Going forward, sales of the PROTON Persona, PERODUA Viva and continuous new launches/facelifts by both local and foreign automakers are expected to drive the industry’s growth in the short and medium term, translating into increased demand for automotive components and potentially improvement in earnings for Delloyd.