MARC has assigned a rating of AID (A Flat, Islamic Debt) to Ace Polymers (M) Sdn Bhd’s (Ace) proposed RM70.0 million Bai’ Bithaman Ajil Islamic Debt Securities. The assigned rating reflects Ace’s status as one of the Tier-1 suppliers to the local automotive industry; strong financial results characterized by its favourable operating profit margin and sufficient cash flow coverage and an issue structure that prioritizes payments relating to the BaIDS over operating expenses. The rating is, however, moderated by its high pro-forma debt leverage position, dependence on the performance of the national cars and the vulnerability of the local automotive industry to economic cycles and growing competition arising from trade liberalization.

Ace produces and supplies plastic-based modules/components like bumpers, instrument panels and grilles radiators to PROTON, PERODUA and Naza Automotive Manufacturing Sdn Bhd (NAM). For the latest financial year, FY2003, revenue contribution from these three companies are about equal – one third each. Going forward, Ace envisages the contribution breakdown to remain the same.

In order to remain competitive, Ace is establishing itself as one of the vendors that has “end-to-end” capability. This basically means Ace is able to design and develop a product, go through the prototyping stage before mass production. Since 1997, Ace has been appointed by PROTON and PERODUA to help develop and design several products, but only in 2003 was it able to showcase its “end-to-end” capability when it was appointed by NAM to design, develop and produce 17 exterior parts for the Naza Ria.

Revenue for FY2003 climbed 81% following the commencement of production of the Naza Ria components. Accordingly, Ace’s operating profit margin rose to 25.9% from 19.3% in the previous year. In comparison to its peers, Ace’s average operating profit margin over the past three financial years was one of the highest. For the tenure of the BaIDS, Ace is projecting an average operating margin of 26%.

Projected average and minimum DSCR for the next seven years are 6.3 times and 5.3 times respectively; well above the covenanted level of 1.5 times. Sensitivity analysis on the cash flow projection shows that even if sales remain stagnant for the tenure of the BaIDS, the average and minimum DSCR remains strong at 3.8 times and 2.2 times respectively.

Pro-forma debt-to-equity ratio of 2.5 times is considered quite high. However, the serial redemption of the BaIDS starting from the second year of the programme, coupled with increase in retained earnings should bring down the ratio to a more comfortable level in the next two years.