Leader Universal Holdings Bhd - 2007

Major Rating Factors

Strengths

• Predominant position in local cable industry
• Healthy liquidity and demonstrated ability to generate cash flows in excess of capital expenditure.

Challenges/Risks

• Participation in cyclical, price competitive, and capital intensive cable industry.
• A high degree of industry and customer concentration
• Relatively high debt service costs
• Potential significant cash outlay on its second power plant project in Cambodia.

Rationale         The ratings of Leader Universal Holdings Berhad’s RM150.0 million Murabahah Medium Term Notes Issuance Programme has been reaffirmed at AID, with a Developing Outlook. The rating reflects. The ratings reflect the group’s moderate, and steadily improving, operating margins in a challenging market characterised by rising raw material prices, severe pricing pressure and the cyclical demand patterns of end users. These factors are mitigated by LEADER’s market-leading position in highly competitive segments of the cable industry. The Group’s business risk profile is moderate, given the cyclical nature of demand and the commodity-like nature of many products. In FY2006, despite rising copper prices, the Group’s financial debt remained stable, reflecting a debt leverage ratio of 1.13 times. In an effort to  improve margins and diversify revenue, LEADER is increasing its focus on specialty cables in its operations and is planning to expand its energy operations (which already accounts for about 6.5% of revenues). The Developing Outlook reflects the impact to the Group of the proposed development of a 200MW coal-fired power plant in Sihanoukville, Cambodia. While MARC notes the improvement in its credit metrics at as 31 December 2006 and the proposed non-recourse basis of any borrowings taken by its subsidiary companies in Cambodia, cashflow measures may weaken on account of equity funding requirements for the new power plant. The rating, however, is moderated by SAJH’s highly leveraged capital structure that reflects the significant utilization of debt to finance the company’s capital expenditure programme (but limited by the maximum debt limit of RM2.0 billion allowed under the Concession Agreement), and the relatively high proportion of non-revenue water arising mainly from water leakages.

The ratings continue to benefit from LEADER's consistent improvement in size and profitability as well as expected improvement in cash flows due to higher commodity prices coupled with the ability to pass through rising raw material prices. LEADER remains Malaysia’s largest cable and wire manufacturer, having recorded revenues of RM2.36 billion and net income of RM55.7 million for the year ended 31 December 2006. As at December 2006, the Group had a contractual order book of RM700 million. The Group’s power generation unit, Cambodia Utilities Pte Limited (CUPL), continues to reap consistent returns from its 35MW diesel engine heavy fuel oil-fired power generating plant in Cambodia.

LEADER‘s revenue of RM2,365 million in FY2006, a historic high, was achieved on the back of higher metal prices and a 5.3% increase in sales volume from its cable and wire operations. It is a significant 47.6% improvement against FY2005’s revenue of RM1,602 million. The Group also recorded a higher cash flow of RM72 million from its operations against RM54 million in FY2005. Its power generation operations in Cambodia provided steady income in the form of US$4.7 million of dividends in FY2006. In addition, LEADER repaid its Euroconvertible Bonds (ECB) in April 2007. The Group had cash and bank balances of RM144 million as at FYE2006. Coupled with unutilised credit facilities of RM92 million as at 30 June 2007, the Group has strong financial flexibility.

LEADER is in the midst of preparing for its second power plant project in Cambodia. Construction of the power plant is expected to begin in 2009 and it will commence operations in 2012. LEADER’s equity participation of US$50 million in this project may see significant cash outflows to Cambodia in 2009 and 2010.