MARC has assigned the ratings of MARC-2ID/AID to Symphony House Berhad’s (Symphony) RM100.0 million Islamic Commercial Paper/Medium-Term Notes (CP/MTN) Programme. The ratings reflect, amongst others, Symphony’s cashflow generating capabilities supported by a healthy mix in various business segments; the growth potential of Symphony’s Business Process Outsourcing (BPO) services, via Vsource Asia Sdn Bhd (Vsource) which provides a steady revenue stream to the group; and its strong market position as a system integrator in the Malaysian financial services industry. The ratings are however moderated in view of the inherent volatility in performance of the information technology services industry.  Of the RM100.0 million CP/MTN, Symphony intends to issue between RM25.0 million to RM55.0 million in the initial issue to be utilized towards the partial refinancing of its existing borrowings and funding the acquisition of Corporatehouse Services Sdn Bhd, a company involved in the provision of corporate secretarial, accounting and payroll services. The remainder of the proposed facility shall be utilised for future acquisitions and general funding requirements.

Incorporated in 2002, Symphony was listed on MESDAQ of Bursa Malaysia in 2003 and subsequently transferred to the Main Board in September 2005. Symphony grew rapidly over the last three years and was on an acquisition trail resulting in the addition of 13 subsidiaries, including Symphony Global Sdn Bhd Group (SGSB) and Vsource Group. The activities of Symphony are divided into two main business lines, i.e. IT Services and Managed Services.

The IT Services division encompasses systems integration, solutions services, consultancy and services related to cheque processing. Symphony’s foothold in the financial services industry is via its subsidiary SGSB which has an exclusive distributorship of Silverlake Integrated Banking System (Silverlake) in Malaysia. MARC notes that this division is prone to one-off contracts though some degree of stability in revenue is derived from the maintenance fees from five out of ten anchor banks which are using the Silverlake system. In addition, Symphony has exhibited its competitive strength in securing contracts with recent contracts comprising of provision of IT solution services to a pension fund and a regulatory agency.  Nevertheless, the IT division is exposed to vagaries in demand influenced by the respective corporations and institutions’ budget for IT spending coupled with competition from other established players in the industry.

The Managed Services comprise of business obtained from share issuance and registration, secretarial, accounting, corporate advisory and BPO services. This division provides a stable revenue stream for Symphony largely contributed by Vsource which provides BPO services covering amongst others human resource, customer support, employee support, financial and accounting solutions. Vsource has a strong presence in Malaysia, Japan and Taiwan with a wide customer base comprising mainly of multi-national companies.

Revenue has been on an upward trend over the last two years mainly driven by the IT Services and Managed Services divisions with the latter benefiting from the addition of Vsource into the group. Despite revenue reporting an increase in FY2005 to RM197.7 million (FY2004: RM133.1 million), profitability measures continued to be on a declining trend due to higher operating expenses contributed by the full year inclusion of Vsource; higher project costs by the IT Services division; and losses incurred due to the start-up costs of the cheque processing division. Symphony’s interim results for the first quarter of FY2006 reported significant improvement in revenue and profit before taxation of 70% to RM55.3 million (1QFY2005: RM32.5 million) and 79% to RM4.1 million (1QFY2006: RM2.3 million) respectively in comparison to the preceding corresponding period. This was largely attributed to the higher contribution from the IT and BPO divisions and unrealised foreign exchange gain on the USD term loan of approximately RM1.0 million.

MARC notes that the projected revenue over the tenure of the proposed facility will be equally contributed between the IT Services and Managed Services divisions resulting from the inclusion of Vsource in Symphony. MARC views this positively as Symphony’s revenue will be more stable due to the recurring nature of the income generated by the Managed Services division. The Symphony’s proforma debt equity level is expected to be 0.4x following the initial drawdown of RM25.0 million Islamic CP/MTN (Symphony intends to drawdown between RM25.0 million to RM55.0 million in FY 2006). Based on MARC’s computation, the cashflow projections during the tenure of the proposed facility is expected to be robust with the base case finance service coverage ratios (FSCR) depicting average and minimum FSCR of 28.5x and 5.2x respectively.  In addition, the cashflow coverages proved adequate despite sensitising revenue with delays in collections and reduction in sales.