MARC has affirmed the short and long term ratings of MARC-2ID/AID  respectively of second-tier materials handling and factory automated solutions provider, Malaysian AE Models Holdings Berhad’s (“MAE”) RM200 Million Islamic Commercial Paper/Islamic Medium-Term Notes Programme. The ratings carry a stable outlook. The ratings reaffirmation reflects MAE’s improved geographic diversity and expanding order book. These strengths are tempered to some extent by competition from low cost manufacturers in China, vulnerability to volatility in raw material prices and customer’s discretionary spending, which in turn, is largely influenced by economic developments in key markets. Additionally MAE’s negative cash flow from operations remains a major concern.

MAE’s strategy of positioning itself as a one-stop automated materials handling and factory automation system solutions provider has helped the group to differentiate itself from low cost manufacturers with moderate success. Meanwhile, MAE’s niche market strategy of focusing on medium scale projects affords the group some degree of protection from competitive pressures from well-established international manufacturers. MAE has expanded its marketing presence and currently has a total of sixteen marketing offices and three representative offices spread across Malaysia, China, Thailand, Singapore, Indonesia, India, Australia, Philippines, Denmark, Germany and Japan.

As at October 2006, the group had approximately RM280.1 million worth of contracts in hand. These contracts include maintenance and technical services contracts that will provide annual recurring income of approximately RM70.0 million per annum for a duration of up to ten years. As part of the group’s strategy to maintain its growth momentum, it is setting up production facilities in India and Vietnam to benefit from the stronger demand in these fast growing economies.

By geographical segments, more than 80% of MAE’s current order book is from the overseas markets with the USA, Indonesia and China accounting for almost 56%. At the same time, MARC recognises there are challenges and risks inherent in the regional expansion strategy including those related to managing multiple production bases in a geographical spread footprint.

MAE’s revenue increased 54.2% to RM286.8 million in FY2006 from RM186.0 million in FY2005. The improvement in the group revenue follows from an increase in sales for bulk handling systems and contract manufacturing business as well as an increase in overseas contract jobs. Consequently, profit before tax rose by 47.6% to RM18.6 million from RM12.6 million in FY2005. Despite the increase in profit before tax, profit margins were dampened marginally due to increases in raw material prices (mainly steel prices) coupled with intense price competition created by small-sized manufacturers in China.
 
MAE’s base case cash flow projections indicates sufficient debt service capacity with an average and minimum coverage ratio of 4.3x and 2.1x respectively. During the year, MAE’s debt-to-equity ratio increased slightly to 1.1x due to the MAE’s rising working capital requirements, in tandem with its revenue growth.

In the near term, MARC expects growth driven capital expenditures to constrain cash flow growth. Over the intermediate term, growing demand is projected to support earnings growth and debt service capacity.