Boon Koon Group Bhd - 2009

MARC has downgraded Boon Koon Group Bhd’s (BKGB) long-term rating to A-ID from AID and affirmed its short-term rating at MARC-2ID with respect to its RM100 million Islamic Commercial Papers / Islamic Medium Term Notes (ICP/IMTN). The ratings carry a negative outlook. The downgrade reflects the group’s weakened competitive position arising from unfavourable changes to the import quota regime for used commercial vehicles in Indonesia and registration issue in its home market of Malaysia, its lengthening cash conversion cycle amid rising inventories and trade receivables, and the modest headroom for debt leverage under covenants of the ICP/IMTN. The negative outlook, meanwhile, reflects a deterioration of its market prospects for rebuilt commercial vehicles and the continuing lack of trading visibility.

The ratings have been placed on MARCWatch Negative since February 2009 following a debt-to-equity covenant breach based on its unaudited balance sheet as at December 31, 2008 (FY2008). At end FY2008, the group’s debt-to-equity ratio had risen to 1.58 times compared to its covenanted level of 1.50 times mainly on account of its weak financial performance for FY2008 in which it incurred a RM12.6 million pre-tax loss. The loss, which caused BKGB’s equity base to contract by RM11.8 million as compared to end FY2007 was caused by reduced commercial vehicles sales; foreign exchange losses; and expenses incurred on winding-down loss-making subsidiaries. The MARCWatch placement also considers recent changes in management which emphasize the broad challenges facing the company.

BKGB is currently the only listed commercial vehicle rebuilding company in Malaysia, competing with 17 other non-listed players. The group’s plant situated in Nibong Tebal, Penang has a total built-up area of approximately 202,168 sq feet with an annual capacity to produce up to 2,400 rebuilt commercial vehicles. Following the lower sales of rebuilt commercial vehicles, BKGB has downsized its commercial vehicle rebuilding business in East Malaysia. Similarly, the group has wound down its unprofitable business in Indonesia due to the loss of its import quota for used commercial vehicles previously allocated to BKGB by the Indonesian government. The group has recognised about RM4.0 million of operating losses incurred in connection with the downsizing of its East Malaysian operations and closure of its Indonesian operations as at December 31, 2008.

Apart from the group’s weaker financial performance in FY2008, its lengthening cash conversion cycle and current challenging trading conditions raise concerns over its cash flow generation ability and its capacity to address its covenant breaches in the near-term. Following the technical breach, BKGB has been issued a notice of breach by the trustee for its failure to comply with the financial covenants. Failure to provide explanation of the breach and action plans to remedy the breach within 14 days from the notice date of February 24, 2009 could result in a potential event of default and acceleration of debt repayment.

Major Rating Factors

Strengths 

• Integrated rebuilt commercial vehicles manufacturer;
• Secured parts supplies through long-term arrangement with UK-based Daimler AG; and
• Geographical diversification in the machineries handling equipment division supports wider earning base.

Challenges 

• Deteriorating financial performance due to lower sales of rebuilt commercial vehicles;
• Prolonged cash conversion cycle due to heavy build up of inventory and trade receivables; and
• Debt leverage as at December 31, 2008 exceeded gearing cap.