MM Vitaoils Sdn Bhd - 2010

MARC has affirmed its MARC-2_ID rating on MM Vitaoils Sdn Bhd’s (MMV) RM45.0 million Murabahah Commercial Paper (MCP) Programme and maintained a negative outlook on the rating. The negative outlook reflects continued concerns over insufficient operating cash flows to support the build-up of MMV’s sinking fund from August 2011 onwards to meet its first CP redemption of RM20.25 million due in February 2012. Moderating MARC’s concerns somewhat is the satisfactory progress made by MMV in negotiations with its bankers to wholly refinance the outstanding commercial papers. MARC’s current rating action assumes successful refinancing of the rated facility by MMV’s targeted financial close of December 2010. Failure to complete the refinancing exercise by the indicated timeframe would exert downward pressure on the rating.

The affirmed rating acknowledges MMV’s ability to respond to shifts in market demand, the non-cyclical nature of demand for its edible oil palm products and management’s cost rationalisation initiatives and efforts to improve operating efficiency. The rating, however, continues to be constrained by the price volatility of its raw materials which account for close to 80% of sales, its low production capacity utilisation rate, long cash conversion cycle and modest equity base.
 
MMV manufactures and sells edible palm oil products, namely liquid cooking oil, margarine, shortening and vegetable ghee, mainly for export. Its export markets now cover 76 countries encompassing Central Asia, Europe, the Middle East and Africa, with export sales making up 99% of its revenue. The diversity of its markets allows MMV to adjust its geographic sales mix in response to demand as reflected in year-to-year changes in its sales composition by region. A case in point would be the weakening demand from Europe (31.6% of sales in FY2007 to 9.1% of sales in FY2009) which was compensated by an almost equivalent strengthening of demand from the Middle East (15.3% of sales in FY2007 to 33.4% of sales in FY2009). Underlying this was the added advantage of the company’s ability to customise its packaging sizes/materials and multiple brand name platforms to suit the unique needs of the different markets.

Although the company’s revenue growth for the financial year ended December 31, 2009 (FY2009) was almost flat at RM102.1 million, its pre-tax profit increased by 44.4% to RM6.2 million, the highest level since FY2005. Operating profit margins widened to 10.0% from single digit previously (FY2008: 7.6%). The improved profitability was due to lower average crude palm oil (CPO) prices which declined to RM2,240/MT in 2009 compared to RM2,853/MT in 2008 and cost savings in fixed overheads from rationalisation and production efficiency programmes.

Cash flow from operations have been negative historically except for FY2008 and FY2007, reflecting the purchase of key raw materials on cash terms and sales of its palm oil products by issuance of letters of credit. Cash conversion cycles are typically more than five months.

Gearing increased to 2.21 times (x) (FY2008: 1.71x) as the company drew down new trade facilities from a bank to support its working capital and capital expenditure requirements. Based on the latest management accounts for the six-month period ended June 30, 2010, gearing has declined to 2.03x and remains within its covenanted 2.50x threshold. Unencumbered cash and bank balances stood at RM3.7 million as at June 30, 2010 relative to short-term borrowings of RM22.5 million.