Nam Fatt Corporation Bhd - 2009

MARC has downgraded its ratings on Nam Fatt Corporation Berhad’s (Nam Fatt) RM250 million Islamic Commercial Paper/Islamic Medium Term Notes Programme (ICP/IMTN) to  MARC-3ID /BBB+ID from MARC-1ID/A+ID and concurrently placed the ratings on MARCWatch Negative. The downgrade reflects significant and severe deterioration in the credit profile of Nam Fatt due to material delays in the progress of certain existing projects and unresolved claims in respect of its Sudan-based Melut Basin contract. Previously, the ratings incorporated a considerable amount of uplift from Nam Fatt's stand-alone credit profile on the basis of a pre-determined margin of advance for contracts to be financed under the facility and limitations with regard to eligible contract awarders. Notwithstanding this, the key consideration for MARC’s current rating action of lowering the issue rating to reflect the deterioration in Nam Fatt’s credit profile is our belief that the issue structure will not be able to completely insulate the noteholders from material decline in Nam Fatt’s standalone credit quality. Meanwhile, the MARCWatch Negative placement indicates that further negative rating action could result from the continuing pressure on Nam Fatt’s credit metrics and following completion of MARC's review of the mitigating measures that the company has proposed to undertake.

Nam Fatt is mainly involved in construction & engineering and property development. Its existing order book of RM656 million is significantly below its historical average over a 5-year period of RM1.1 billion. Of the outstanding order book, 58% relates to a petroleum hubs & bunkering facility project, which has achieved 37% completion but has been put on hold due to a dispute among shareholders of the project owner. The project was awarded in the first quarter of 2007 and was slated for completion by mid-2009. In addition, its RM89 million Calvary Convention Center construction project is currently on hold at 24% stage of completion. Nam Fatt’s other major contract, the RM107.83 million Syarikat Perumahan Nasional Berhad (SPNB) low-to-medium cost housing project in Tumpat, Kelantan (SPNB-Tumpat project), has also been delayed at 15% stage of completion.

MARC has reason to believe that Nam Fatt’s strained financial position is one of the causes for the delays where the stalled projects are concerned. On a positive note, the group’s RM272.62 million low-cost apartment project awarded by Thailand’s National Housing Authority (TNHA project) is progressing as scheduled. The SPNB-Tumpat and TNHA projects are funded by the rated facility and the corresponding facility amounts outstanding are RM40 million and RM90 million respectively.

For the 9-month period ended September 30, 2009 (9MFY2009), the group’s total revenue fell 69% to RM137.8 million (9MFY2008: RM441.9 million) owing to its dwindling order book, delays in construction work  and  cost  overruns  resulting  in a  pre-tax  loss  of  RM44.11 million (9MFY2008: pre-tax profit  of RM12.14 million). Consequently, gearing  increased to 0.95 times  from  0.86 times as at end-FY2008. As cash flow from operations has been negative since FY2006, the group has been relying on debt funding to sustain operations. As at end-9MFY2009, receivable days increased to over 1,600 days, where a significant RM403 million of the RM737 million total amounts outstanding is due from construction and variation order claims from its RM684 million Sudan-based Melut Basin contract. The project, which was completed in January 2009, was awarded by Petrodar Operating Company Ltd (POCL), a consortium comprising, among others, Petroliam Nasional Berhad and China National Petroleum Corporation.

MARC anticipates that Nam Fatt’s near-term financial performance will continue to remain weak due to its stalled construction projects, reduced prospects for order book replenishment into 2010 and its eroding liquidity which will affect its ability to fund working capital requirements on projects.

To resolve the MARCWatch Negative placement, MARC will focus on the timeliness and sufficiency of risk mitigating measures that the management of Nam Fatt has proposed to undertake.

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