CREDIT ANALYSIS REPORT

PREMIER MERCHANDISE SDN BHD - 2017

Report ID 5660 Popularity 1468 views 35 downloads 
Report Date Feb 2018 Product  
Company / Issuer Premier Merchandise Sdn Bhd Sector Trading/Services - Retailing
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Rationale

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. The ratings reflect the credit strength of Maybank and Danajamin on which MARC maintains a financial institution rating of AAA/stable and a financial insurer strength rating of AAA(fg)/stable respectively.

As an investment holding company, Premier Merchandise’s credit strength is underpinned by dividend flow from its two indirect key subsidiaries: 7-Eleven Holdings Berhad (7-Eleven) and Singer (Malaysia) Sdn Bhd (Singer), both of which are held through wholly-owned intermediate company Berjaya Retail Berhad (BRetail). BRetail reduced its stake in 7-Eleven to 31.6% from 50.9% while its borrowings rose sharply to RM498.2 million at end-2016. MARC views that the lower dividend expectation going forward and higher group borrowings have weakened Premier Merchandise’s credit profile. Apart from dividend income, Premier Merchandise relies on repayment of advances from its holding company to partly meet its debt obligations. As at end-2016, Premier Merchandise’s net receivables from its related parties stood at RM156.5 million.

In 9M2017, 7-Eleven’s performance had been affected by high operating and finance costs, offsetting sales growth: against improved sales of RM1.64 billion (9M2016: RM1.58 billion), pre-tax profit declined 25.3% y-o-y to RM43.9 million. In line with its expansion to 2,207 stores as at end-September 2017 (9M2016: 2,057 stores), working capital requirements have increased, which have been partly funded by higher borrowings. 7-Eleven’s borrowings rose to RM186.0 million from RM115.7 million between 2016 and 9M2017. MARC notes that 7-Eleven had also utilised proceeds from the increased borrowings to undertake a buyback of its own shares from the market.

Singer, which sells consumer durables and motorcycles as well as provides hire purchase and consumer financing, recorded a 33.3% y-o-y increase in pre-tax profit to RM23.9 million despite a slight revenue decline of 2.0% y-o-y to RM336.7 million in 9M2017 (9M2016: RM18.0 million; RM343.5 million). The company had reduced its number of stores, resulting in savings in administrative expenses, and incurred lower impairment on its hire purchase and equal payment receivables portfolio during 9M2017. Singer had paid dividends of RM40.0 million in 2016, afforded through internally generated funds and proceeds from block discounting of its receivables during the period. The dividends from Singer boosted BRetail’s dividend income to RM70.2 million in 2016 (2015: RM32.6 million). Notwithstanding this, BRetail’s reliance on dividend income to partly meet its financial obligations would come under increased pressure following its reduced stake in 7-Eleven and the increased financing obligations at the convenience store operating level. During the period under review, the increase in BRetail’s borrowings translated into a debt-to-equity ratio of 0.41 times as of 9M2017 (9M2016: 0.32 times).

Premier Merchandise received RM193.4 million in dividends which were entirely used to pay dividends to its shareholders. It has an outstanding RM100 million under each rated programme as at end-October 2017, well below the programme limit of RM110 million for Tranche 1 and RM280 million for Tranche 2 in January 2018.

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 ratings 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.
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