Delloyd Ventures Bhd - 2008

MARC has affirmed its MARC-1ID short-term and AID long-term ratings on Delloyd Ventures Berhad’s (‘Delloyd’) RM100 million Islamic Commercial Papers / Medium Term Notes (CP/MTN) Programme. Concurrently, the rating outlook has been revised to stable from developing. The outlook revision incorporates reduced execution risk in its plantation operation in Indonesia following a successful implementation of an estate rehabilitation programme that has resulted in improved fresh fruit bunches (FFB) output.

The rating outlook incorporates Delloyd’s ability to withstand a moderate reduction in cash generation arising from the increased uncertainty in vehicle sales prospects for the next several quarters and cost pressures faced by its auto parts manufacturing operations. The affirmed ratings reflect Delloyd’s competitive strength as a Tier-One auto parts vendor augmented by improved earnings diversity derived from its venture into oil palm plantation operations, its low debt leverage and fair liquidity position.
 
As a Tier-One domestic auto parts vendor, Delloyd continues to be supported by national car makers, Proton and Perodua, which collectively contributed more than 60% to its revenues in FY2007. This has not only enabled Delloyd to maintain its market share despite intensifying competition but also sustain a reasonable profit margin. By widening its reach to include Indonesia and Thailand where Delloyd has set-up more cost-effective facilities, the group has been able to achieve greater earnings diversity geographically. Revenue contribution from the foreign original equipment manufacturer (OEM) market rose by 15% in FY2007 from 10% in FY2006 driven primarily by recurring sales in Indonesia, Thailand and India. Additionally, Delloyd has penetrated the Latin America market upon securing contracts with GM Venezuela and GM Columbia that are worth about RM8 million per annum.

The group’s plantation business under PT Rebinmas Jaya (PT Rebinmas) has turned around to net earnings of RM0.8 million in 1QFY2008 from a net loss of RM5.0 million recorded in FY2007. Out of 14,600 hectares (ha), 6,577 ha or 45% of the entire estate has been rehabilitated and some 1,260 ha have been replanted in FY2007. With sound estate management, the plantation division is expected to provide the group with a steady income stream in the near- to medium-term.

Increased sales volume helped shore up Delloyd’s profitability measures in FY2007 as indicated by a higher operating profit margin of 7.2% (FY2006: 5.8%). However, in the near-term, Delloyd could face increased pressure on its profit margin in view of rising operating and production costs, exacerbated by higher amortisation charges on its heavy capital investments, particularly in its Indonesian plantation operations. Notwithstanding, Delloyd maintains sufficient liquidity as measured by cash balances of RM34.3 million and substantial undrawn banking facilities of RM86 million as of June 30, 2008. Leverage remained relatively low at 0.19 times (x) vis-à-vis the covenanted gearing level of 1.0x as stipulated in the terms of the Islamic CP/MTN thus providing ample headroom for Delloyd to source additional borrowings. The remaining undrawn amount of RM50 million under the Islamic CP/MTN Programme would augment Delloyd’s working capital requirement in relation to its sizable investment in Indonesia.

Major Rating Factors

Strengths

Challenges/Risks

• Heavy reliance on sales of national automakers, Proton and Perodua;
• Subdued outlook for car sales; and
• Eroding margins caused by rising production and operating costs;