TH Group Bhd - 2007

MARC has reaffirmed its MARC-2/A ratings of TH Group Berhad’s (THG) RM200 million Commercial Papers/ Medium Term Notes (CP/MTN). The ratings carry a developing outlook. The ratings reflect the profitability of THG’s plantation operations and expected improvement in its earnings and cashflow as a result of declining losses on its unprofitable venture capital and money lending businesses. The developing outlook reflects THG’s evolving business profile as a result of a shift in the focus of the construction division towards project management as well as its foray into coal mining and the longer-term credit implications of its changing business profile.

THG is involved in the cultivation and management of palm oil estates, contracting services (construction and coal mining), technology, healthcare sector and venture capital. THG registered a pre-tax loss of RM13.8 million in FY2007, notwithstanding its plantation segment’s profit (before interest) of RM76.0 million. THG’s construction division had incurred a segment loss (before interest) for the second consecutive year of RM34.9 million in FY2007, mainly as a result of write-offs for uncollected receivables and foreseeable losses on contracts amounting to RM50.8 million during the two years. THG is reducing its exposure to the typical construction-related risks facing a contractor by taking on more of a project management role while THG continues to bid for projects to bolster its order book which as of September 2007, stood at RM61.9 million. THG’s construction backlog will occupy the group at least until 2009. It has also commenced, its coal mining operations in Kalimantan upon the resolution of licensing issues. Coal production began in December 2007 and is expected to contribute meaningfully to THG’s revenues going forward. The group’s healthcare and venture capital divisions continued to record segment losses (before interest) of RM6.0 million and RM1.2 million respectively in FY2007. THG plans to exit from these loss-making businesses once it is able to realize satisfactory market values from the divestments.

Debt servicing capacity is backed by its plantation division’s operating performance as well as cash and bank balances of RM20.7 million as at December 2007. THG is in compliance with its maximum permitted gearing ratio of 1.25 times and debt service coverage ration (DSCR) of 1.50 times. The group’s gearing ratio of 0.94 times as at December 2007 provides some headroom for higher utilization of its undrawn bank facilities totaling RM83.8 million. MARC believes that if capital spending requirements remain modest, the group’s internal cashflow generation would be adequate to address its upcoming debt maturities. The group’s cashflow protection measures remain sensitive to increased crude palm oil (CPO) price and demand volatility.

Nevertheless, deterioration in THG’s financial performance or failure to monetize its non-core investment holdings in a timely manner to generate sufficient proceeds will exert pressure on the existing ratings.

Major Rating Factors

Strengths

• Plantation operations have benefited from a phase of high crude palm oil (CPO) prices.

Challenges/Risks

• Restoring the group’s profitability and balance sheet strength;
• Turning around the operating performance of its loss-making units; and
• Significant debt maturities commencing 2009 and onwards.