Friday, Mar 29, 2002
MARC re-affirmed its AAA(bg) rating on Sinmah’s RM50 million redeemable bond issue due 2002, guaranteed by Cooperatieve Centrale Raifesen-Boereenleenbank B.A. of Nederlands (Rabobank). The rating reflects the strength of the unconditional and irrevocable guarantee provided by Rabobank, which has a rating of ‘AAA’ from Fitch. Meanwhile on the underlying rating of the issue, Sinmah’s financial flexibility has weakened as a result of its unsuccessful rights issue and as a result, the company is now exposed to increased refinancing risk with the approaching maturity of the RM50 million bonds in August 2002. The need to access adequate new funding comes at a difficult time in the domestic poultry industry, which currently faces the combined challenges of uncertain economic conditions and a weak pricing environment.
Sinmah is presently the third largest poultry integrator in the country. In recent years, Sinmah has demonstrated an ability to shift its product mix steadily towards more value-added products. MARC views this as a key factor in moderating business risk, given the poultry industry’s thin margins and the large economies of scale needed to maintain profitability. Potential operating synergies and cost-saving opportunities arising from the group’s recent strategic investments in layer and broiler farming companies has allowed the group to moderate the pressure on operating margins currently felt by smaller producers. However, we believe that profitability will continue to be adversely affected by the price deflationary environment over the next several quarters.
Sinmah’s operating trends reflect cyclical demand conditions and wide fluctuations in price. Starting from the second half of FY1999, prices began to recover from a prolonged slump, peaked in FY2000 before falling in the third quarter of FY2001. Although turnover of the Group’s poultry integration business grew by 6.1% in FY2001, pre-tax profit (before minority interest) suffered a 48.1% drop. In the first six months to July 31, 2001, lower selling prices of broilers and table eggs caused profit after tax and minority interest to decline from RM4.1 million in the corresponding period last year to RM2.4 million. The group’s cash flow protection measures are presently very thin. Cash flow from operations debt coverage was down from 0.3x in FY2000 to 0.2x in FY2001. Although MARC believes that the group will maintain positive financial performance in the coming quarters, the likelihood of only modest internal cash flow in the near future suggests that the group’s ability to repay debt from its operating cash flows will be limited. Interest expenses of over RM10 million annually as well as term loan maturities will continue to be a heavy use of internal cash flow.
The group’s financial leverage remains elevated, a legacy of Sinmah’s past aggressive growth strategy, which was funded with debt to a large extent. Sinmah had earlier proposed a rights issue to shore up its balance sheet and improve its financial flexibility. Prevailing weak equity market conditions, however, impaired the ability of substantial shareholder, FCH Holdings Sdn Bhd to subscribe for its rights entitlement, ultimately resulting in non-completion of the equity raising exercise. Restoration in Sinmah’s balance sheet appears remote in the near-term, and it is very likely that Sinmah will have to resort to debt refinancing to redeem its bonds come August 2002. The group’s refinancing flexibility is a primary risk factor at this juncture given Sinmah’s weakened profitability and currently challenging market conditions.
Sinmah is presently the third largest poultry integrator in the country. In recent years, Sinmah has demonstrated an ability to shift its product mix steadily towards more value-added products. MARC views this as a key factor in moderating business risk, given the poultry industry’s thin margins and the large economies of scale needed to maintain profitability. Potential operating synergies and cost-saving opportunities arising from the group’s recent strategic investments in layer and broiler farming companies has allowed the group to moderate the pressure on operating margins currently felt by smaller producers. However, we believe that profitability will continue to be adversely affected by the price deflationary environment over the next several quarters.
Sinmah’s operating trends reflect cyclical demand conditions and wide fluctuations in price. Starting from the second half of FY1999, prices began to recover from a prolonged slump, peaked in FY2000 before falling in the third quarter of FY2001. Although turnover of the Group’s poultry integration business grew by 6.1% in FY2001, pre-tax profit (before minority interest) suffered a 48.1% drop. In the first six months to July 31, 2001, lower selling prices of broilers and table eggs caused profit after tax and minority interest to decline from RM4.1 million in the corresponding period last year to RM2.4 million. The group’s cash flow protection measures are presently very thin. Cash flow from operations debt coverage was down from 0.3x in FY2000 to 0.2x in FY2001. Although MARC believes that the group will maintain positive financial performance in the coming quarters, the likelihood of only modest internal cash flow in the near future suggests that the group’s ability to repay debt from its operating cash flows will be limited. Interest expenses of over RM10 million annually as well as term loan maturities will continue to be a heavy use of internal cash flow.
The group’s financial leverage remains elevated, a legacy of Sinmah’s past aggressive growth strategy, which was funded with debt to a large extent. Sinmah had earlier proposed a rights issue to shore up its balance sheet and improve its financial flexibility. Prevailing weak equity market conditions, however, impaired the ability of substantial shareholder, FCH Holdings Sdn Bhd to subscribe for its rights entitlement, ultimately resulting in non-completion of the equity raising exercise. Restoration in Sinmah’s balance sheet appears remote in the near-term, and it is very likely that Sinmah will have to resort to debt refinancing to redeem its bonds come August 2002. The group’s refinancing flexibility is a primary risk factor at this juncture given Sinmah’s weakened profitability and currently challenging market conditions.