PREMIER MERCHANDISE SDN BHD - 2016

MARC has affirmed its AAA_(bg) and AAA_(fg) ratings on Premier Merchandise Sdn Bhd’s (Premier Merchandise) RM300 million 7-year Medium-Term Notes (MTN) Programme (Tranche 1) and RM300 million 9-year MTN Programme (Tranche 2) respectively with a stable outlook. Tranche 1 and Tranche 2 are guaranteed by Malayan Banking Berhad (Maybank) and Danajamin Nasional Berhad (Danajamin) respectively, and the ratings reflect the credit strength of the guarantors. Maybank has financial institution rating of AAA/stable while Danajamin has a financial insurer strength rating of AAA/stable from MARC.

Premier Merchandise is an investment holding company whose standalone credit strength is underpinned by dividend flow from two indirect key subsidiaries Singer (Malaysia) Sdn Bhd (Singer) and 7-Eleven Malaysia Holdings Berhad (7-Eleven). Both are held through wholly-owned Berjaya Retail Bhd (BRetail). Apart from the dividend income, Premier Merchandise is expected to rely on disposal of assets by its subsidiaries and/or repayment of advances from its holding company for debt settlement. As at end-2015, Premier Merchandise’s net receivables from its related parties stood at RM175.0 million.

For 1H2016, 7-Eleven upstreamed dividend of RM28.4 million (1H2015: RM32.6million) to BRetail. The performance of the convenience store operator has remained strong, recording an increase of 22.0% y-o-y in pre-tax profit to RM43.3 million on the back of improved sales of RM1.03 billion in 1H2016. Operating margins improved to 4.3% (1H2015: 3.6%). In line with its rapid expansion of its stores, which stood at 2,001 stores as at end-June 2016 (end-December 2015: 1,944), working capital requirements have increased. This has been funded by debt of RM49.2 million; 7-Eleven has also re-allocated the approved proceeds for capex of RM40.8 million from its listing proceeds of RM250.3 million to be utilised for working capital to support its operation.

Singer, which provides hire-purchase and consumer durable financing, recorded an increase of 7.6% y-o-y and 7.5% y-o-y in revenue and pre-tax profit to RM542.2 million and RM49.9 million respectively, mainly on improved sales of motorcycles and home appliances as well as increased in interest income from its motorcycle hire purchase and consumer durables financing. Singer’s earnings continued to be moderated by impairment losses on its financing activities. Nonetheless, Singer has improved its operating profit margin at 11.7% in 2015 from 10.9% from the previous year due to cost saving from distribution activities.

BRetail received lower dividends of RM32.6 million from 7-Eleven in 2015 as compared to RM417.8 million in 2014 which was due to a one-off gain from listing proceeds of 7-Eleven. Singer did not upstream any dividend; BRetail’s other operating subsidiary, Berjaya Radioshack Sdn Bhd (Radioshack), which markets consumer electronics through 16 outlets nationwide has been hampered by recurring losses.

During the period under review, BRetail raised about RM200 million through a term loan, of which RM60 million was upstreamed as dividends and RM100 million as advances to its parent Premier Merchandise. The increase in its borrowings has translated into debt-to-equity ratio of 0.50 times in 2015 (2014: 0.12 times). As at end-June 2016, Premier Merchandise has outstanding RM100 million each under the rated programmes; its upcoming redemption of RM75.0 million MTN is under Tranche 1 and will fall due in August 2017 which the company could reissue under the rated programme.

Notwithstanding Premier Merchandise’s standalone risk factors, noteholders are insulated from the downside risk related to its credit profile by the guarantees provided by Maybank and Danajamin. Any change in the supported ratings or rating outlook would be primarily driven by changes in the credit strength of the guarantors.

Major Rating Factors

Strengths

• Established “7-Eleven” and “Singer” franchises; and
• Longstanding operational track record.

Challenges/Risks

• Increased borrowings at the intermediate holding company;
• Thin operating margins in core operations; and
• Dependence on residual cash flow from its key operating subsidiaries.