Mithril Bhd - 2008

MARC has downgraded the rating of Mithril Bhd’s (Mithril) RM59 million Redeemable Convertible Secured Loan Stocks (RCSLS) from BBB- to BB on account of the company’s continuing dismal financial performance, its failure to recommence its brick-manufacturing operation after a fire incident, and its tight working capital position which severely constrained its yacht fabrication operation in FY2007. In addition, the shrinking demand for its architectural moulding products due to the housing recession in the United States coupled with rising raw material prices have further exacerbated Mithril’s weak financial position. However, these factors have been somewhat mitigated by recurring rental income from its property investments which has been supporting its Sinking Fund Account (SFA) requirements.

Mithril’s principal activities are the manufacturing and trading of architectural mouldings which contributed to 85.0% of its revenue in FY2007. Mithril’s property rental income accounted for 14.4% of its revenue in FY2007. Rental income from its commercial buildings, one in Kota Kinabalu and another in Kuching, that are leased to a related company, Malaysian Assurance Alliance Berhad (MAA), is paid into the SFA for the redemption of the outstanding RCSLS upon maturity.

Mithril’s secondary operations include the fabrication of luxury yachts and manufacturing bricks. Mithril had also planned a venture into the manufacturing and distribution of PVC products, but now intends to dispose of this business along with the brick-manufacturing operation, while halting fabrication operations temporarily.

As a result of a difficult operating environment, Mithril suffered a 26% fall in revenue to RM47.63 million (FY2006: RM64.51 million) while pre-tax loss rose by 36.2% to RM14.82 million in FY2007 (FY2006: RM10.88 million). Architectural mouldings are fully exported, with the US and Russia accounting for 91% of moulding sales in FY2007. The deterioration in financial performance was mainly attributed to the continuing slump in the US housing market, margin erosion caused by the strength of Ringgit vis-à-vis US dollar, and a RM3.88 million write-down on inventories.

Its debt leverage rose 0.98 times in FY2007 to fund working capital requirements. In the same period, the group’s shareholders’ funds eroded due to rising accumulated losses. For its unaudited results year ending June 30, 2008, Mithril suffered a further deterioration in its debt leverage to 1.42 times, hovering close to its debt covenant cap of 1.50 times. The management has indicated it is currently in the midst of restructuring the loan stocks, which is only expected to be completed by June 2009, in addition to its on-going efforts to pare down borrowings.

The negative outlook reflects its weakened financial profile and low likelihood of restoring profitability and cash flow generation in the short-term. Despite having already received assistance from a related company (MAA Credit Sdn Bhd) in the form of a revolving credit facility to settle its latest coupon payment, Mithril remains cash-strapped and will face increased funding difficulties as its gearing covenant severely restricts its financing options. MARC believes that in light of the difficult industry fundamentals that Mithril is facing, its ability to service its debt obligations will depend on financial support from shareholders in addition to proceeds from disposals of investments.

Major Rating Factors

Strength

• Direct remittance of monthly rentals into a sinking fund.

Challenges/Risks

• Immediate liquidity constraints;
• Export demand severely affected by weakness of the US economy; and
• Margin pressures stemming from rising raw material prices.