Mithril Bhd - 2010

MARC has downgraded its rating on Mithril Bhd’s (Mithril) RM59 million Redeemable Convertible Secured Loan Stock (RCSLS) to B from B+. Its rating outlook is maintained at negative. The rating action reflects Mithril’s continuing losses as a result of worsening prospects of its mainstay polyurethane (PU) architectural mouldings business and its impaired balance sheet following certain investment writedowns, resulting in a gearing covenant breach that places the group’s status as a going concern in doubt. The group’s heavy reliance on asset disposals to generate needed liquidity to meet its RCSLS obligations signals increased execution risk given the weaker office space fundamentals in Kota Kinabalu at present. Mithril’s Menara MAA building in Kota Kinabalu (MAAKK) which is provided as security for the RCSLS was revalued at RM65 million in fiscal 2010 from RM75 million previously. The security margin provided by MAAKK has fallen to 1.56 times (FY2009: 1.79 times), marginally above the RCSLS’ security margin requirement of 1.5 times.

Following the weak financial performance for the financial year ending June 30, 2010 (FY2010), Mithril has been classified as an Affected Listed Issuer by Bursa Malaysia under Practice Note 17 (PN17) on August 30, 2010. The group’s shareholders’ funds have eroded to below 25% of paid-up share capital in FY2010. Mithril’s revenue declined to RM15.5 million in FY2010 (FY2009: RM24.9 million), while pre-tax losses widened to RM49.4 million (FY2009: RM3.9 million) arising from RM18.5 million impairment of investment properties, RM14.9 million in goodwill write-off from the acquisition of Mithril Saferay Sdn Bhd and RM3.6 million loss on disposal of its brick-manufacturing assets.

Further conversion of RM4.1 million of Mithril’s RCSLS into equity during the third quarter of its current financial year (3QFY2010) has reduced Mithril’s nominal outstanding RCSLS to RM41.8 million. However, the losses experienced by Mithril has also increased the group’s gearing sharply to 6.5 times as at end-June 2010 from 1.2 times a year earlier as defined under the Trust Deed, and is in breach of its covenanted level of 1.50 times.

In addition to its losses, Mithril’s cash flow from operations declined to negative RM12.9 million in FY2010 (FY2009: positive RM11.8 million). Mithril’s cash and cash equivalents have been depleted despite continued asset disposals, including its non-operational brick-manufacturing business for RM13.6 million, on April 2, 2010. MARC believes that the likelihood of a turnaround in the group’s business prospects in the near-to-medium term is low, and a capital and/or asset injection is critical to restore the future viability of the group. The negative outlook reflects the potential for further downward rating pressure given the challenges the group faces in meeting its forthcoming sinking fund obligations under its RCSLS, its weak liquidity and unsustainable capital structure.

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Challenges/Risks