MARC has assigned ratings of A+ID/MARC-2ID to Capable Aspect Sdn Bhd’s (CASB) proposed issuance of up to RM40 million Islamic Medium-Term Notes Issuance Facility/ Murabahah Underwritten Notes Issuance Facility (‘IMTN/MUNIF) respectively. The ratings carry a stable outlook. The ratings for CASB, a holding company, principally reflect the projected financial and credit profile of Sinagama II Technologies Sdn Bhd (SSB), a leading domestic contract sterilization service provider. This strength is countered by the competitiveness and weaker operating profit margin of its logistics business. 

CASB is a special purpose vehicle created for the exclusive purpose of issuing notes to finance the acquisition of SSB. The total purchase consideration amounts to RM44.83 million. Majority shareholders will be offered RM15.1 million in cash and RM8 million in the form of CASB shares and the minority shareholders, RM21.7 million in cash. Net proceeds amounting to RM36.83 million will be used for the acquisition purposes and the balance of RM3.17 million will be allocated towards fees, working capital and the pre-funding of the Reserve Account.

The core business of SSB is providing sterilization and decontamination services using gamma and ethylene oxide (EtO) sterilization mainly for medical device items through its wholly owned subsidiaries, Sterilgamma (M) Sdn Bhd (SGM) and Sterilgamma (Kulim) Sdn Bhd (SGK). The group also provides logistics services through its wholly owned subsidiary, Sterilgamma Logistics Sdn Bhd (SGL), enabling products to be transported directly to end customers of SGM and SGK anywhere around the world.

For financial year 31 December 2006 unaudited results, SSB recorded revenue of RM27 million compared to RM24 mil in the previous year. The increase of 11% was aided by higher contribution from gamma and EtO division which posted a stellar growth of 24%, with a revenue of RM24 million compared to RM15 million in the previous year. However, overall revenue growth was moderated on account of the logistics division which saw 20% revenue decline in the current year. Over the next three years, the sterilization business is expected to contribute 58% to group’s gross profit level. Operating margin showed a significant improvement to 19% against 11% in the previous year on the back of increased in demand and higher charges for its sterilization services. The latter turns in a margin of 50% to 60% range as compared to logistics, single digit margin. Going forward, management expects that the overall operating margin would be maintained between 18% to 20%.

With the proposed bond issuance, CASB’s pro-forma consolidated debt to equity ratio is estimated to increase to 0.64x. The group generates significant discretionary cash flow given its relatively high capex and high operating margins. Based on the un-audited results of year 2006, operational cash flow improved to RM7.7 million from RM6 million in year 2005, representing an increase of 28% year on year. According to the cash flow projections, the average and minimum debt service cover ratio (DSCR) over the tenure of the notes are expected to be 4.15x and 7.2x respectively, with revenue growth projected around 5% yearly. Cash flow projections are sensitive towards a drop in revenue and increase in operating cost. In the light of generally favourable long term business fundamentals, MARC expects that the group’s cash flow to remain relatively steady and supportive of credit measures consistent with current ratings.

The stable outlook relies on the continuation of conservative financial policies, which include moderately low leverage, the funding of acquisitions in a prudent manner and minimal dividend distribution. Any deterioration in performance from current expectations, diversification into unrelated business and significant changes in the business environment could however, result in downward pressure to the ratings.