Dawama Sdn Bhd - 2009

MARC has assigned ratings of A+IS for Dawama Sdn Bhd’s (Dawama) Senior Sukuk Musyarakah of RM120.0 million and AIS for Dawama’s Junior Sukuk Musyarakah of RM20.0 million. The one-notch difference in ratings reflects the Senior Sukuk’s priority of repayment and redemption over the Junior Sukuk. The rating carries a stable outlook. The proceeds of the Sukuk will be used to redeem Dawama’s existing Islamic Commercial Paper/Medium Term Notes programme and for working capital requirements. Sukukholders will invest in a Musyarakah Venture (MV) to provide capital towards the financing of Dawama’s printing and distribution activities under a 12-year Concession Agreement (CA) with DBP terminating in 2014. Sukukholders will only have the benefit from the collections of the MV to cover principal payments of and returns on the Sukuk. The ratings reflect the structural features of the Sukuk which ringfences cash flows generated by the MV via designated accounts and a payment waterfall which ranks repayment and expenses of the Sukuk ahead of operating and general expenses of the MV. The Trustee will be the sole signatory of the designated accounts.

The ratings are further strengthened by Dawama’s stable revenue growth attributable to the CA which guarantees the off-take of its textbook publications by the Ministry of Education (MOE). Moderating the credit strength is Dawama’s exposure to adverse changes to MOE’s policies which is assessed to be low. There have been no significant policy changes to date apart from the withdrawal of a few publications in 2004 which were reinstated in 2005. In addition, cost escalations could pose a risk under the concession, although this risk has been adequately mitigated to date through MOE’s price-setting approach which takes into consideration the incremental costs during the tenure of publication cycles.

Dawama was incorporated to undertake the privatisation of DBP’s printing and distribution of publications under the CA. The publications include textbooks (government loaned-textbooks and open market sale) and DBP’s general publications. For the financial year ending April 2008 (FY2008), 84% of Dawama’s publications were comprised of government loaned-textbooks (FY2007: 55%) due to the implementation of the 100% Textbook Loan Scheme for national schools effective starting at the beginning of the 2008 school year.

For FY2007, Dawama registered a pre-tax profit of RM9.8 million on the back of revenue totaling RM147.2 million. The return to profitability coincided with a change in the company’s financial year end to April which allows the company to better align revenue with expenses.

As Dawama outsources more than 70% of its printing publications, its business model requires nominal investments in fixed assets. Dawama’s borrowings are primarily employed for its working capital requirements. Based on end-April 2008 numbers, its debt-to-equity ratio is expected to increase to 4.3 times (FY2007: 3.9 times) after taking into account the RM140 million proposed Sukuk Musyarakah on a pro-forma basis. The company has historically maintained high debt leverage levels. However based on projected earnings to be derived from a new publication cycle and a scheduled redemption of the Sukuk, debt leverage ratios are expected to fall below 3.0 times starting FY2010 and progressively decline on account of the scheduled redemptions. Under the facility terms, Dawama is to maintain an annual debt-to-equity ratio of less than 4.0 times commencing in FY2010.

For FY2007, Dawama’s reported negative operating cash flows of RM1.7 million were mainly due to an increase in receivables from related companies. However, measures taken by its management to reduce these receivables and adopt tighter cash management measures have resulted in positive cash flows of RM14.6 million for FY2008 results. Further comfort is derived by a requirement under the Sukuk Musyarakah which restricts related party receivables to only 20% of the revenue at financial year-end commencing 2010.

The stable outlook reflects MARC’s expectations of Dawama’s steady generation of revenue, profitability, and positive cash flows, and the gradual reduction of its debt leverage. Rating stability is also premised on continued assignment of textbook printing rights to DBP by the MOE. Any adverse changes in policy by the MOE may cause downward rating pressure.

Major Rating Factors

          Strengths 

• Sole concessionaire of Dewan Bahasa dan Pustaka (DBP) for 12 years, with exclusive rights to print and distribute school textbooks and other publications by DBP;
• Assured off-take by the Ministry of Education (MOE) and an established distribution network; and
• Rising student enrolments at schools offering the national curriculum.
  
  Challenges/Risks
  
  
•  Adverse change(s) in policy by the MOE;
• No guarantee of minimum volume of printing orders under the concession; and
• Pricing inflexibility caused by MOE’s price-setting approach.