Monday, Mar 06, 2000
Malaysian Rating Corporation Berhad (MARC) has assigned a rating of MARC-3 (bg) to CNLT (Far East) Berhad’s (CNLT), RM50 million syndicated bank guaranteed revolving underwritten notes issuance facility. The rating reflects the strength of the unconditional and irrevocable bank guarantees provided by a consortium of banks, based on the weakest link approach. CNLT’s own financial capacity to meet its obligations on the notes is supported by its average business position as a moderate-sized domestic yarn producer and its satisfactory financials. These positives are balanced by the uncertain outlook for global textile markets and future competition which invariably expose the company to price and volume pressures.
CNLT operates in the yarn sub-sector of the intensely competitive and cyclical textile industry. The company, which produces fine quality yarns, sold about 65% of its turnover to the export market in 1998, while the rest was for the domestic market. Falling demand for yarn stemming from ongoing weakness in the Asian economies has led to cutbacks in production by industry participants worldwide. Nonetheless, export sales to the EU and the USA helped CNLT to better weather the downturn in domestic sales and operate its plant at optimal capacity. MARC expects operating conditions in the near and intermediate-term to remain difficult, with declining demand and overcapacity in the industry.
The company’s modest size in terms of yarn output denies it some of the economies of scale potentially available to larger competitors. Nonetheless, CNLT has managed to maintain good positions in certain niches; combed cotton yarns, twisted yarns, polyester yarns and blended yarns. CNLT’s association with JCT Limited, India’s third largest manufacturer of cotton and cotton blended textiles, provides the company with access to extensive research and development (R&D). CNLT remains keen to grow its international presence and will be setting up an office in UK in the near future to cater for its EU market. Operationally, the company continues to strive for efficiency improvements to compete effectively against the production cost advantages that other major yarn producers in less industrialised countries enjoy.
The company’s cost reduction initiatives and improved (higher value-added) product mix have led to some improvement in its underlying performance and profitability measures. CNLT’s operating profit margin improved from 14.5% in FY96 to 18% in FY98. Despite a fall in output in FY98, CNLT’s turnover maintained an upward trend in Ringgit terms, owing to the high value added product mix and an increase in the proportion of USD denominated export sales. Further improvements in the company’s operating margins and returns are likely to be constrained by weak mid-term prospects for recovery in textile demand. Uncertainty also exists regarding the extent to which the gains from productivity and product mix improvements can be sustained. The company’s cost profile is especially vulnerable to changes in the prices of imported raw materials.
Notwithstanding the improving trend in profitability measures, liquidity remained tight predominantly due to an increase in working capital requirements. Interest coverage remained low, reflecting the company’s high level of gearing and increased interest costs. The company’s financial profile is aggressive, with funding sources skewed towards debt. Leverage has been historically above 1x (time) with the exception of FY98. Ongoing debt reduction and curtailed capital spending should help the company to maintain adequate debt service coverages. Going forward, CNLT hopes to maintain the debt equity ratio below 1. Still, future debt leverage will be dependent on the company’s ability to generate free cash flows. Furthermore, the company’s cash flow displays vulnerability to price and volume pressures.
CNLT’s financial flexibility, albeit limited would stem from shareholders’ support and its listed status, which would afford better access to new equity capital than its non-listed competitors. Most of its assets, which are in the form of plant, machinery and leasehold land are charged for current borrowings with an estimated security cover of 1.91 times. MARC notes that, in the past, financial support for capital expenditure was also provided through shareholders advances.
CNLT operates in the yarn sub-sector of the intensely competitive and cyclical textile industry. The company, which produces fine quality yarns, sold about 65% of its turnover to the export market in 1998, while the rest was for the domestic market. Falling demand for yarn stemming from ongoing weakness in the Asian economies has led to cutbacks in production by industry participants worldwide. Nonetheless, export sales to the EU and the USA helped CNLT to better weather the downturn in domestic sales and operate its plant at optimal capacity. MARC expects operating conditions in the near and intermediate-term to remain difficult, with declining demand and overcapacity in the industry.
The company’s modest size in terms of yarn output denies it some of the economies of scale potentially available to larger competitors. Nonetheless, CNLT has managed to maintain good positions in certain niches; combed cotton yarns, twisted yarns, polyester yarns and blended yarns. CNLT’s association with JCT Limited, India’s third largest manufacturer of cotton and cotton blended textiles, provides the company with access to extensive research and development (R&D). CNLT remains keen to grow its international presence and will be setting up an office in UK in the near future to cater for its EU market. Operationally, the company continues to strive for efficiency improvements to compete effectively against the production cost advantages that other major yarn producers in less industrialised countries enjoy.
The company’s cost reduction initiatives and improved (higher value-added) product mix have led to some improvement in its underlying performance and profitability measures. CNLT’s operating profit margin improved from 14.5% in FY96 to 18% in FY98. Despite a fall in output in FY98, CNLT’s turnover maintained an upward trend in Ringgit terms, owing to the high value added product mix and an increase in the proportion of USD denominated export sales. Further improvements in the company’s operating margins and returns are likely to be constrained by weak mid-term prospects for recovery in textile demand. Uncertainty also exists regarding the extent to which the gains from productivity and product mix improvements can be sustained. The company’s cost profile is especially vulnerable to changes in the prices of imported raw materials.
Notwithstanding the improving trend in profitability measures, liquidity remained tight predominantly due to an increase in working capital requirements. Interest coverage remained low, reflecting the company’s high level of gearing and increased interest costs. The company’s financial profile is aggressive, with funding sources skewed towards debt. Leverage has been historically above 1x (time) with the exception of FY98. Ongoing debt reduction and curtailed capital spending should help the company to maintain adequate debt service coverages. Going forward, CNLT hopes to maintain the debt equity ratio below 1. Still, future debt leverage will be dependent on the company’s ability to generate free cash flows. Furthermore, the company’s cash flow displays vulnerability to price and volume pressures.
CNLT’s financial flexibility, albeit limited would stem from shareholders’ support and its listed status, which would afford better access to new equity capital than its non-listed competitors. Most of its assets, which are in the form of plant, machinery and leasehold land are charged for current borrowings with an estimated security cover of 1.91 times. MARC notes that, in the past, financial support for capital expenditure was also provided through shareholders advances.