MM Vitaoils Sdn Bhd - 2008

MARC has reaffirmed its MARC-2ID rating on MM Vitaoils Sdn Bhd’s (MMV) RM70.0 million Murabahah Commercial Papers Programme (MCP). The rating outlook has been revised to stable from developing. The rating is supported by the downstream edible oil producer’s diversified export revenue base, rising per capita consumption trends in end markets, its improving cost structure and adequate liquidity position. The rating is, however, constrained by its exposure to rising raw material prices, competitive market conditions, the modest size of its operations, its small equity base and limited funding flexibility.

MMV is a manufacturer of edible palm oil products namely liquid cooking oil, margarine, shortening and vegetable ghee. The company’s activities are significantly export oriented, with approximately 97% of revenues earned during FY2007 from foreign markets, supported by strong demand from Middle East, Central Asia and Eastern Europe. The balance of its revenues is derived from local sales of cooking oil, mainly on cash terms through its kiosk. Improved sales across all products contributed to MMV’s revenue growth of 52.6% to RM87.0 million in FY2007 (FY2006: RM57.0 million). MMV’s core products, shortening and cooking oil, contributed 47.4% and 46.1% of sales respectively. Meanwhile, its better product mix and packaging as well as aggressive marketing and promotion which benefited from the endorsement of the Malaysian Palm Oil Board (MPOB), aided the company’s expansion into 62 countries in 2007.

The company’s pre-tax profit doubled to RM5.6 million in FY2007 on account of better product margins as well as cost reduction initiatives in the form of process line automation and bulk purchases of packaging materials. Operating profit margins edged up marginally to 9.3% in FY2007 from 8.8% in the previous year. Despite rising crude palm oil (CPO) prices which accounts for 85% of production cost, MMV’s profit margins were held up by its ability to pass on higher CPO costs to its clients.

MMV’s cash flow position reflected marginal improvement in FY2007 as a result of a revision in credit terms from 180 to 120 days. This alleviated some pressure on MMV’s working capital requirements. Export sales, which involve settlement by way of letter of credit, minimises credit risk. The outstanding MCPs of RM44.0 million are fully underwritten, mitigating rollover and near-term liquidity risks.

MMV’s debt to equity ratio stood at 1.95 times in FY2007 based on total borrowings of RM44.0 million and shareholders’ funds of RM22.4 million. Its gearing level is expected to be pared down gradually on account of its improved earnings and cash flow generation, underpinned by increases in both capacity utilisation and sales. The scheduled reduction of the MCP which starts in FY2012 (Year 6) requires MMV to deposit, either the lower of RM30.0 million or 45% of the outstanding amount, into a sinking fund account six months prior to the reduction date.

The stable outlook reflects MARC’s expectation of MMV maintaining a stable financial performance and adequate liquidity amidst rising operating costs.

Major Rating Factors

Strengths

• Diversified export revenue base;
• Rising consumption of edible palm oil products in end markets; and
• Improving margins on account of rising composition of higher margin products as well as cost reduction initiatives.

Challenges/Risks

• Funding additional working capital needs stemming from rising raw material costs; and
• Mitigating cost pressures in the face of rising CPO prices.