Asia Brands Corporation Bhd - 2008

MARC has assigned short and long term ratings of MARC-2 and A+  to Asia Brands Corporation Berhad’s (ABC) proposed Programme issuance of up to RM70.0 million Commercial Papers/ Medium Term Notes (‘CP/MTN Programme’ or ‘the Programme’) respectively. The ratings carry a Stable Outlook. The ratings reflect its prominent domestic brands in the baby products and children apparels and ladies’ undergarments segments, its low debt leverage and strong cash flow generation. The rating also incorporates the Group’s moderate sensitivity to changes in consumer demand and spending patterns.

ABC’s products fall under three broad categories, namely, ladies’ undergarments, baby products and children apparels, which are marketed under brand names such as Audrey and Anakku. ABC outsources the manufacturing of its products, enabling the Group to maintain low levels of fixed overheads and to focus on product design and brand marketing.

The Group's revenue and profit has been on an uptrend since FY2003 following the acquisition of the Anakku Group in FY2003. In FY2007, the Group maintained this trend, with its revenue and pre-tax profit increasing by 9.0% and 46.8% respectively as compared to FY2006 (12-months results). The improvement in the results was attributed primarily to increased sales during the financial period coupled with tighter cost control and lower finance costs. Its baby and children products segment contributed approximately 72.1% of the Group's total revenue in FY2007. The baby and children products segment also overtook the lingerie segment in terms of contribution to Group’s pre-tax earnings due to its higher composition of higher margin children’s apparel. Going forward, the baby and children products segment is expected to continue as the Group’s biggest profit contributor. The Group’s operating profit margin rose to 10.1%, due to higher revenue and stable overhead costs. The higher operating profit, and reduced level of borrowings which resulted in lower finance costs, was reflected in improved OPBIT interest coverage.

The Group has historically taken on a modest amount of debt, comprising solely of short term facilities to fund working capital requirements. In FY2007, its debt-to-equity (DE) ratio improved further to 0.06 times due to a repayment of borrowings (mostly comprising bankers' acceptances) and higher shareholders equity as a result of increased profit retention as compared to the previous year. In line with improvements in its cashflow from operations (CFO) and lower finance costs, CFO interest and debt coverage ratios have also shown a marked improvement as compared to FY2006.

For the Group’s interim third quarter results ended 31 December 2007, the Group reported revenue of RM126.0 million and a pre-tax profit of RM14.4 million, a 12.5% and 25.7% increase respectively when compared to the previous corresponding period. The favorable results were mainly driven by a new range of products, namely Anakku Junior as well as improved sales in baby products. The Group’s DE ratio increased to 0.13 times mainly due to drawdown of bankers’ acceptance as well as letters of credit (LC) issued during the period. Assuming full drawdown of the RM70.0 million under the CP/MTN Programme, ABC’s pro-forma DE ratio of 0.77 times provides some headroom vis-à-vis its covenanted cap of 1.0 times.

Although weaker consumer spending patterns in the near-term could dampen the recent uptrend in revenues and operating profits, MARC believes that cash flow generation and credit measures should remain strong, in line with its rating level. ABC’s business model, in particular its outsourcing of manufacturing operations and consumable baby products, should position it well to weather a general slowing of consumer demand.

Major Rating Factors

Strengths

• Well recognized ‘Anakku’ and ‘Audrey’ brands;
• Good medium- to long-term growth prospects for baby products and children apparels segments;
• Strong debt protection measures;
• Outsourced manufacturing operations afford better margin protection and low fixed overheads.

Challenges/Risks

• Weaker domestic consumer demand as a result of decline in real household income