Premium Nutrients Bhd - 2008/2009

MARC has revised its outlook on its ratings of Premium Nutrients Berhad’s (Premium Nutrient) RM85 million Murabahah Underwritten Notes Issuance Facility/Islamic Medium Term Notes (MUNIF/IMTN) to developing from stable. Concurrently, MARC has affirmed its MARC-2ID /AID ratings on the MUNIF/IMTN programme.

The revised rating outlook reflects MARC’s concern about Premium Nutrient’s ability to build adequate liquidity ahead of the significant debt maturities it faces in 2009 and 2010 given its negative net operating cash flow in the first quarter of 2009 (1Q2009) and uneven cash flow generation prior to 1Q2009. MARC would consider a stable outlook if Premium Nutrient demonstrates the ability to maintain a satisfactory level of cash flow and liquidity to fund its upcoming debt repayments.

The affirmed ratings continue to reflect Premium Nutrient’s average business risk profile as a producer of specialty fats with a broad product range, diversified end-markets and defensible market niche in specialty fats.  These positives are moderated by strong competition among specialty fats producers, inherently low profit margins, and volatility in feedstock prices. Volatile raw material prices pose particular challenges on the group’s working capital and liquidity management, as experienced by Premium Nutrient in 2008.

Premium Nutrient’s product sales mix of specialty to non-specialty fats is 40:60. Premium Nutrient exports 90% of its specialty fats and sells 90% of its non-specialty fats locally. Based on its audited results for financial year ended December 31, 2008 (FY2008) revenue grew faster than pre-tax profit, increasing by 14.3% and 2.2% respectively year-on-year. Premium Nutrient’s revenue and earnings were affected by volatile feedstock prices during the period under review. Crude palm oil price declined by 35% to an average RM2,200 per tonne in the second half of 2008 from an average RM3,400 in the first six months of 2008.

Premium Nutrient’s pre-tax profit improved marginally to RM7.6 million (FY2007: RM7.4 million) while its operating profit margin narrowed to 2.4% (FY2007: 2.8%) arising from foreign exchange translation losses  incurred  with  respect  to  its Indian. Although  the  group  generated positive net cash flow from operations of RM18.5 million, its liquidity position remains tight as indicated by Premium Nutrient’s unencumbered cash and bank balance which stood at RMRM3.9 million as at end-December 2008. 

In the first quarter of FY2009, its revenue of RM186.8 million was 18.9% lower than the previous corresponding period (1Q2008:  RM230.4 million) attributable to lower feedstock prices. Operating profit margin improved slightly to 3.8% mainly due to operational efficiencies. Premium Nutrient’s debt-to-equity ratio climbed to 1.23 times as at end-March 2008 owing to increased debt levels, albeit still  in compliance with its maximum debt-to-equity covenant limit of 1.25 times. Its total borrowings stood at RM221.1 million, of which RM180.8 million are due within the next 12 months. Nevertheless, the bulk of its short term borrowings are trade and working capital facilities.

Despite the group’s improved earnings, its net cash flow from operations was a negative RM4.9 million due to higher working capital requirements. Nevertheless, MARC expects the company’s working capital requirements to reduce in line with lower feedstock prices, going forward. MARC believes that Premium Nutrient’s ability to consistently generate free cash flow and  improve its liquidity position will be critical in light of debt repayments which include RM9.5 million maturing in August 2009 and RM15.0 million maturing in February 2010.

Major Rating Factors

Strengths

• High quality specialty fats with long established track record;
• Broad product range and a well diversified customer base help mitigate demand risk; and 
• Fairly strong research and development capabilities with patented technology and products.

Challenges/Risks

• Sustaining profitability amid challenging operating environment;
• Increased competition in the edible oils and fats industry;
• Heavy debt repayment could weaken free cash flow; and
• Limited financial flexibility in the event of a steep price hike of raw materials.