The ratings of Leader Universal Holdings Berhad’s (LEADER) RM150.0 Million Murabahah Medium-Term Notes Issuance Programme has been reaffirmed at AID, with a stable outlook. The ratings reflect the Group’s dominant market position in the domestic cable and wire manufacturing industry coupled with stable recurring revenue contributions from its power generation business in Cambodia. LEADER’s buy back and early repayment of its Euroconvertible Bonds 1997/2007 during the year under review further underlined the improving financial position of the Group.  Offsetting these credit positives are its exposure to volatile commodity prices which resulted in increased working capital requirements for its cable and wire operations in FY2005, the diminishing contribution from its property development division and the Group’s rising debt-leverage position. Nevertheless, LEADER has demonstrated its ability to pass through rising raw material prices to its customers as reflected in its better operating margins despite volatile raw material prices. LEADER’s market position which is a function of its size and product mix relative to its peers provides significant advantages from economies of scale. Moving forward however, LEADER remains challenged to maintain its dominant position in the areas of improving its operating margins through the enhancement of operational efficiency, costs reduction and the ability to secure significant contracts.

The Group with revenues in excess of RM1 billion annually for the past five years commands a strong position on the domestic front. Its major customers, Tenaga Nasional Berhad (TNB) and Telekom Malaysia Berhad (Telekom), are the Group’s largest domestic customers accounting for 9% and 6% of its total revenue respectively from the cable and wire segment. The Group exports about 36% of its products to more than 30 countries worldwide. As at December 2005, the Group had a contractual order book of RM600 million.

The Group’s power generation unit, Cambodia Utilities Pte Limited (CUPL) continues to reap consistent returns from its 35MW diesel engine heavy-fuel oil fired power generating plant in Cambodia. The concession for its power generation plant is for 18 years beginning 1997, on a “take or pay” basis. CUPL continued to be the largest contributor to the Group’s bottom line in FY2005 and is expected to continue to contribute significantly for the remaining duration of the concession.

The financial profile of the Group has shown improvement in FY2005 with a reported pre-tax profit of RM46.9 million on the back of revenue amounting to RM1.6 billion as compared to a pre-tax profit of RM25.4 million on revenue of RM1.27 billion in FY2004, a result of the Group’s efforts to rationalise and consolidate its business operations.
 

Cash flow coverage improved in FY2005 due to higher reported revenue coupled with a lower level of inventory. LEADER’s DSCR of 1.85 times is above the covenanted level of 1.5 times. With shareholders’ funds of RM453.5 million as at 31 December 2005, a full draw down on the remaining RM60 million of the MMTN expected in 2007 will result in a pro-forma D/E of 1.36 times. The risk of breaching the covenanted D/E of 1.30 times is somewhat mitigated as part of the funds will be utilised for the redemption of its Euroconvertible Bonds (ECB).

Additionally, a proposal for a revision of the covenanted debt to equity ratio of the MMTN Programme to 1.75 times will cater for the group’s increased working capital requirements and ensure adequate working capital to meet any rise in raw material prices.

In its unaudited 12 months results for FY2006, LEADER reported higher revenue of RM2.37 billion (FY2005: RM1.60 billion) and an operating profit of RM100.0 million reflecting a 4.23% operating profit margin (FY2005: 4.64%). The slightly lower margin was attributed to a lower contribution from its power generation subsidiary as a result of a major scheduled maintenance of the plant coupled with rising raw material prices. For FY2006, copper and aluminium prices averaged at USD6,327 and USD2,498 per metric tonne respectively as against USD3,679 and USD1,899 per metric tonne respectively in FY2005.

Over the same period, the Group’s debt leverage level improved to 1.12 times due to the repayment of USD34.8 million of its Euroconvertible Bonds in FY2006. 

On 21 February 2007 the Group announced that they had been selected as the successful bidder for the development of a 200MW coal-fired plant north of Sihanoukville, the largest port in Cambodia. The contract which LEADER estimates will entail an investment of over RM1bil for a 30-year concession on a build, operate and own basis is not expected to have an impact on the current rating as negotiations to finalise the contract are only expected to be completed at the end of 2007 and the project commencement thereafter set to take place in July 2008.