Friday, Apr 04, 2003
The rating of MARC-1(bg)/ A- (bg) assigned to CNLT (Far East) Bhd’s RM60 million Proposed Bank Guaranteed CP/ MTN reflects the strength of the unconditional and irrevocable bank guarantees provided by a consortium of financial institutions which consist of Aseambankers, Malayan Banking Berhad, Bumiputra Commerce Berhad and EON Bank Berhad to guarantee the nominal value of the BG CP/MTN. The rating approach on the bank guarantees is based on the weakest link approach.
CNLT is a medium sized manufacturer of yarn. Around 65% of CNLT’s products are exported while the remaining 35% are sold in the domestic market. The export market comprises both quota and non-quota countries, with exports to the USA (a quota country) accounting for 50% of CNLT’s total revenue. This significant geographical concentration exposes the company to the US economy. CNLT operates in a highly fragmented and competitive domestic market set against a decline in global economic tempo and heightened international competition due to the implementation of the Asean Free Trade Area (AFTA) in year 2003 and the phasing out of the quota system.
With the imminent liberalization of the textile industry in the wake of the implementation of AFTA and the phasing out of the quota system, operational efficiency of the market participants has assumed greater importance. Recognizing this, CNLT continues to invest in automation and technology in its production line to stay competitive, to reduce unit costs, and ultimately boost productivity. CNLT’s competitive edge is demonstrated by its ability in meeting customized requests, maintaining a long standing track record with renowned customers, in addition to seeding new markets and developing customized products for niche markets.
FY2001 was a challenging year for the group as the effects of the global economic slowdown was compounded by the September 11 attack and the reduction in textile demand from the US, which resulted in a decline in exports to the US and drop in the price of yarn. This was aggravated by the delayed reduction in raw material prices and hence operating cost remained high. In the domestic market, CNLT faced intense price competition in imports from India, Pakistan and Asean countries. Consequently, revenue declined by 16% to RM80.5 million in FY2001 (FY2000: RM95.7 mil). As the rate of reduction in operating cost was less than that of revenue, CNLT reported an operating loss before interest and tax of RM0.5 million.
MARC expects the operating environment in the near-to-medium-term to remain challenging in view of the sluggish global economy and rising operating costs. The price of the main raw material, cotton, which fell in FY2001, trended up again in 2002 due to production declines as a result of bad weather conditions. Profitability is expected to improve when yarn prices are revised upwards in the future, subject to the cost of raw material stabilizing.
Despite the tough market environment and a difficult year in 2001, CNLT’s FY2002 3rd Quarter results displayed an impressive turnaround from a loss of RM3.8 million recorded in the corresponding period last year to a profit of RM1.0 million in September 2002. This reflects the stabilizing price of yarn and a lower production and operating cost.
CNLT’s cash flow protection measures improved slightly, backed by stronger net cash flow from operations of RM2.5 million arising from the combined effects of a reduction in inventory levels and trade receivables. Cash flow coverage of interest improved to 1.48x from 1.02x notwithstanding the high interest expense. Going forward, CNLT’s own financial capacity to meet its obligations under the notes is dependent on its ability to generate sufficient inflows from its yarn sales, in the increasingly difficult textile market environment. Furthermore, the company’s cash flow displays vulnerability to price and volume pressures.
The company’s debt leverage is fairly high at around one time, with the debt maturity profile skewed towards long term debt. As at end December 2002, CNLT’s banking lines amounted to RM110.55 million, of which RM83.58 million were utilized.
CNLT is a medium sized manufacturer of yarn. Around 65% of CNLT’s products are exported while the remaining 35% are sold in the domestic market. The export market comprises both quota and non-quota countries, with exports to the USA (a quota country) accounting for 50% of CNLT’s total revenue. This significant geographical concentration exposes the company to the US economy. CNLT operates in a highly fragmented and competitive domestic market set against a decline in global economic tempo and heightened international competition due to the implementation of the Asean Free Trade Area (AFTA) in year 2003 and the phasing out of the quota system.
With the imminent liberalization of the textile industry in the wake of the implementation of AFTA and the phasing out of the quota system, operational efficiency of the market participants has assumed greater importance. Recognizing this, CNLT continues to invest in automation and technology in its production line to stay competitive, to reduce unit costs, and ultimately boost productivity. CNLT’s competitive edge is demonstrated by its ability in meeting customized requests, maintaining a long standing track record with renowned customers, in addition to seeding new markets and developing customized products for niche markets.
FY2001 was a challenging year for the group as the effects of the global economic slowdown was compounded by the September 11 attack and the reduction in textile demand from the US, which resulted in a decline in exports to the US and drop in the price of yarn. This was aggravated by the delayed reduction in raw material prices and hence operating cost remained high. In the domestic market, CNLT faced intense price competition in imports from India, Pakistan and Asean countries. Consequently, revenue declined by 16% to RM80.5 million in FY2001 (FY2000: RM95.7 mil). As the rate of reduction in operating cost was less than that of revenue, CNLT reported an operating loss before interest and tax of RM0.5 million.
MARC expects the operating environment in the near-to-medium-term to remain challenging in view of the sluggish global economy and rising operating costs. The price of the main raw material, cotton, which fell in FY2001, trended up again in 2002 due to production declines as a result of bad weather conditions. Profitability is expected to improve when yarn prices are revised upwards in the future, subject to the cost of raw material stabilizing.
Despite the tough market environment and a difficult year in 2001, CNLT’s FY2002 3rd Quarter results displayed an impressive turnaround from a loss of RM3.8 million recorded in the corresponding period last year to a profit of RM1.0 million in September 2002. This reflects the stabilizing price of yarn and a lower production and operating cost.
CNLT’s cash flow protection measures improved slightly, backed by stronger net cash flow from operations of RM2.5 million arising from the combined effects of a reduction in inventory levels and trade receivables. Cash flow coverage of interest improved to 1.48x from 1.02x notwithstanding the high interest expense. Going forward, CNLT’s own financial capacity to meet its obligations under the notes is dependent on its ability to generate sufficient inflows from its yarn sales, in the increasingly difficult textile market environment. Furthermore, the company’s cash flow displays vulnerability to price and volume pressures.
The company’s debt leverage is fairly high at around one time, with the debt maturity profile skewed towards long term debt. As at end December 2002, CNLT’s banking lines amounted to RM110.55 million, of which RM83.58 million were utilized.