MARC has affirmed the ratings of MARC-2ID/A-ID for Prinsiptek Corporation Berhad’s (“Prinsiptek”) Murabahah Commercial papers (“MCPs”) Programme of up to RM30 million and Murabahah Medium Term Notes (“MMTNs”) Programme of up to RM50 million, with a negative outlook. The rating reflects Prinsiptek’s average business risk profile as a midsize domestic construction company and its moderate financial risk profile. The Group has been growing its revenue consistently, notwithstanding the downturn in the construction market which began in 2003. The negative outlook, meanwhile, considers the challenges posed by a weak housing market as well as the measured pace of implementation of government projects under the Ninth Malaysia Plan (9MP), and the likelihood that a recovery in the construction industry may not be sufficient to initiate an increase in contractor margins. Profitability is down as a result of stiffer competition and narrower margins, and the Group’s financial profile is also facing pressure from increasing receivables and consequently, rising working capital driven-debt.

Prinsiptek began its foray into the local construction scene in 1990 and is engaged in building construction, property development and the trading of building materials. Prinsiptek is currently listed on the Main Board of Bursa Malaysia Securities. The Group’s client base was, until recently, mostly composed of domestic government or government related bodies. Housing construction projects have been the mainstay of Prinsiptek’s contracting services since the late nineties, essentially secured via competitive bidding. To complement its construction activities, the Group also ventured into property development, albeit on a much smaller scale. The focus of property development activities, which previously centered on in-house residential projects, is shifting towards project management of external property developments. Here, Prinsiptek manages property development projects on behalf of a developer, and avoids the landbank and inventory issues that a property developer typically has to contend with. In common with many of its domestic peers, the Group has also ventured abroad in pursuit of foreign construction projects to build its order book. Prinsiptek has secured a turnkey project from the National Housing Authority of Thailand valued at RM194.0 million for the development and construction of 4,619 units of low cost apartments. The Group’s order book of RM354.8 million which is likely to be converted to revenues over the next two years, offers clarity to near-term revenue projections.
 
The Group’s strategy of focusing on construction projects and project management of client property developments underpins its average business risk profile in MARC’s view. In recent years, Prinsiptek has also gradually reduced its reliance on local government projects by undertaking more private sector projects. The Group’s involvement in cross-border projects will help offset risks associated within the domestic operating environment: sluggish demand for construction services, industry overcapacity and strong margin pressures. However, it remains to be seen whether this strategy will be supportive of more robust profit growth, going forward.

Prinsiptek recorded a lower, albeit double-digit operating profit margin of 10.26% in FY2005 compared with the 12.71% in FY2004. Despite increasing revenue, Prinsiptek’s pre-tax profit declined by 17.8% to RM28.2 million in FY2005 from RM34.3 million in FY2004. The lower profits were a result of higher construction costs coupled with a decline in property development contributions. The Group’s current debt to equity ratio stands at 1.09 times as at end FY2005, up from the 0.89 times recorded at the end of FY2004. The higher debt leverage arose from an increase in short-term borrowings to fund the Group’s expansion plan and working capital requirements.

The Group’s ability to generate free cash flow is constrained by its rising working capital requirements, which is a function of its elevated days’ receivables (or average collection period) and higher revenues. Nonetheless, the credit risk attached to the large receivables balances continues to be low given that the credit exposures were mostly in respect of government related entities. Without a meaningful unwinding of working capital and/or infusion of new equity capital, the potential for free cash flow driven-debt reduction remains small.