Prinsiptek Corporation Bhd - 2008

MARC has affirmed the rating of MARC-2ID for Prinsiptek Corporation Berhad’s (Prinsiptek) Murabahah Commercial Paper ( MCP) Programme of up to RM30 million. The rating carries a negative outlook. The rating reflects the company's proven track record for the completion of construction contracts, its focus on government related projects which moderates and customer concentration risks. The rating and rating outlook continue to be tempered by its slow turnover of trade debtors, its continued weak cash flow metrics, limited and current uncertainties facing the industry.

Bursa Malaysia-listed Prinsiptek, is mainly involved in building construction, property development and trading of building materials. By adopting a strategy of undertaking less complex commercial and residential projects, mostly government related projects in the capacity of a subcontractor, and focusing on the rehabilitation of abandoned projects, the group has been able to generate better margins. As at March 31, 2008, the group’s outstanding order book stood at RM375.7 million, out of which 56.2% comprised projects with price escalation clauses which has helped mitigate margin pressure from rising raw material prices.

In financial year ended December 31, 2007 (FY2007), the group’s revenue of RM217.29 million (FY2006: RM316.44 million) and pre-tax profit of RM21.78 million (FY2006: RM26.50 million) fell year-on-year by 31.3% and 17.8% respectively, as a result of the timing of completion and commencement of construction contracts during the year. Over the same period, the group managed to maintain a positive, albeit lower cash flow from operations (CFO) of RM8.89 million (FY2006:RM18.97 million) due to slower collection of trade receivables which rose to RM203.0 million (FY2006: RM168.95 million). As at end March 2008, Prinsiptek had shown some improvement in its collection of long outstanding debts, reflected in a decline in as total trade receivables by RM12.84 million to RM190.16 million. However, further significant reductions will be required to provide adequate liquidity for the group’s upcoming debt maturities. The marginal improvement in Prinsiptek’s gearing level of 0.89 times as at December 31, 2007 (FY2006: 1.07 times) was aided by a repayment of borrowings and profit retention. Out of total borrowings of RM146.91 million, RM81.96 million or 55.8% were short term in nature. The group’s long term borrowings of RM64.76 million include the RM50.0 million due under the CLO.

In the immediate term, although delays in the start up of new contracts may impact revenues in the short term, the time lag may help the group pass on rising raw material costs. The group’s ability to lower its level of trade receivables will be critical in the coming quarters in light of significant near-term debt maturities. The ratings could be lowered in the event Prinsiptek’s liquidity erodes further, given the likelihood for continued industry weakness.

Major Rating Factors

Strengths

• Good completion track record as a contractor;
• Sizeable portion of outstanding order book comprise government-related projects with lower collection risk; and
• Project mix moderates cost-overrun risk.

Challenges/Risks

• Financial flexibility and liquidity burdened by slow repayments from trade customers; and
• Margin erosion arising from raw material cost increases.