CREDIT ANALYSIS REPORT

Premium Nutrients Bhd - 2007

Report ID 2928 Popularity 1465 views 39 downloads 
Report Date Nov 2007 Product  
Company / Issuer Premium Nutrients Bhd Sector Industrial Products - Others
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Normal: RM500.00        
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Rationale

MARC has reaffirmed its MARC-2ID/AID ratings on Premium Nutrients Berhad’s (“PNB”) RM85 million Murabahah Underwritten Notes Issuance Facility/Islamic Medium Term Notes (MUNIF/IMTN). The ratings carry a stable outlook. The ratings reflect PNB’s good business position as a specialty and non-specialty fats manufacturer with a broad product range and geographically diversified customer base which includes a strong presence in India. The rating also incorporates the priority accorded to debt servicing of the notes and the building up of sinking fund balances in the payment waterfall. These strengths are however moderated by the relatively low profit margins of some commodity products, exposure to rising raw material prices and intense price competition within its industry. The stable outlook incorporates PNB’s increasing product, customer and geographic diversity which should lead to greater earnings and cash flow stability over time. PNB’s liquidity is able to support moderate near-term earnings weakness without impact on the rating. Protracted operating profit margin pressure beyond expectations may, however, result in the revision of the stable rating outlook.

PNB Group is mainly involved in processing of palm oil and palm kernel into commodity non-specialty fats and specialty fats. The Group has three manufacturing plants located in Pasir Gudang and Kulai, Johor, and in Kakinada, India. The Group’s sales mix of specialty and non-specialty fats currently stands at 60:40, with approximately 90% of specialty fats produced are exported to markets spanning across Asia, United States, the Middle East, Europe, the Russian Commonwealth of Independent States and Africa. Conversely, approximately 80% of the Group’s non-specialty fats revenue is generated through domestic sales. PNB benefits from stable demand for its products and promising growth prospects given the backdrop of positive global economic growth coupled with the increasing world population. PNB’s commitment to research and development (R&D) enables the group to develop products that meets specific customer needs, which is fundamental to the maintenance of its market share against competitors, apart from providing long-term growth opportunities.

The Group’s revenue growth of 9% to RM488.8 million in FY2006 was achieved on the back of capacity expansion and higher volume of product sales, particularly in the Indian market. As a result of improved production efficiencies and proactive hedging of exposure to changes in prices of its main feedstocks such  as  crude palm oil  and  palm kernel, PNB’s pre-tax  profit more than doubled to RM11.06 million in FY2006. Meanwhile, operating cash flow generation increased substantially to RM33.88 million on account of higher profits achieved and improved receivables collection, translating into stronger cash flow protection measures. Both interest coverage and debt service coverage ratios improved to 2.85 times and 0.18 times respectively (FY2005: 1.27 times and 0.02 times respectively).

For FY2007, despite a 46% increase in revenue to RM716.1 million, PNB recorded a lower pre-tax profit of RM7.4 million, mainly due to escalating distribution costs and other overheads. During the three months period ended 31 March 2008, PNB’s revenue of RM230.4 million was 42.7% higher than the previous year’s corresponding quarter driven by higher CPO prices. Meanwhile, operating margin during the first quarter of 2008 of 2.8% improved marginally as compared to the first quarter of 2007 of 2.5%. PNB’s debt leverage increased to 1.14 times as at December 31, 2007, vis-à-vis the covenanted gearing cap of 1.25 times.  As at 31 March 2008, its debt leverage reduced slightly to 1.09 times. Nonetheless, PNB maintained a healthy cash and bank balance amounting to RM39.1 million as of March 31, 2008.

Major Rating Factors

Strengths

  • Established integrated producer of high quality specialty fats;
  • Broad product range and a well diversified customer base; and
  • Fairly strong research and development capabilities.

Challenges/Risks

  • Sustaining profit margins amidst high palm oil prices; and
  • Increased competition in the edible oils and fats industry.
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