MARC has affirmed the rating of MM Vitaoils Sdn Bhd’s (MMV) RM70.0 Million Murabahah Commercial Papers (MCP) Programme at MARC-2ID with developing outlook. The affirmation reflects MMV’s anticipated improving financials arising from a more focused business strategy supported by Malaysian Palm Oil Board (MPOB) expertise in downstream palm oil research and development (R&D) activities. Moderating factors to MMV’s rating include its limited track record and lack of financial flexibility which may inhibit the company’s expansion plan.

MMV is mainly involved in manufacturing of edible palm oil products namely liquid cooking oil, margarine, shortening and vegetable ghee. Majority of MMV’s revenue is derived from the sale of shortening, which accounted for 60% of its FY2005 revenue. More than 95% of MMV’s products are exported to over 36 countries. MMV’s products are mainly targeted at the recession resilient food industry, where demand is expected to be sustainable due to its high positive correlation with population growth and affluence.

MMV’s plant in Shah Alam is equipped with nine filling lines and capable of producing up to 8,000MT or 400 Full Container Load (FCL) per month. Funds from the MCP essentially provide the much needed working capital to increase its production capacity and eventually are expected to translate into significant improvement in the company’s financial performance. As a result of the late MCP drawdown, completion of MMV’s plant upgrade has been delayed to 4Q2006, subsequently increasing its capacity to produce shortening products by 50% to 4,500 MT/month, which will render additional sales of about RM6.7 million per month.

Faced with working capital constraint, the trade-off between protecting profit margins and keeping costs minimal had suppressed MMV’s top line performance. In FY2005, MMV’s revenue decreased by 42% to RM28.03 million; impacted by the drop in vegetable ghee sales by 82% as a consequence of its strategy to focus more on higher margin products and quality customers. Though MMV’s pre-tax profit was correspondingly reduced by 5.8% to RM1.99 million, the company registered an improvement in its operating margin of 11.1%, due to lower operational expenses. In 1HFY2006, MMV’s revenue improved by 16.3% to RM14.16 million (1HFY2005; RM12.17 million), while pre-tax profit was higher at RM0.85 million (1HFY2005; RM0.14 million). Going forward, the plant upgrade is expected to further enhance MMV’s production of higher value add product and thus improving its future earnings. Higher working capital requirement in FY2005 was noted to have caused tight operating cash flow, hence, weakening MMV’s cash flow protection measures. Nevertheless, MMV’s liquidity position remains manageable with cash and bank balances of RM16.94 million as at end-June 2006. Upon the drawdown of the MCP amounting to RM37 million, MMV’s debt to equity ratio increased to 2.31x as at end June 2006. A maximum debt to equity ratio of 2.5x is covenanted under the issue structure. In addition, the prefunding of the Profit Service Account, which covers six months profit service, somewhat mitigates the liquidity risk of MMV.