MARC has reaffirmed Nam Fatt Corporation Berhad’s (Nam Fatt) ratings for its RM250 million Islamic Commercial Paper/Islamic Medium Term Notes Programme (ICP/IMTN) at MARC-1ID /A+ID. The ratings are predicated on the facility’s tight issue structure which confines the utilization of draw downs under the facility to the financing of working capital requirements for specific contracts or projects, ensures that only contracts or projects with creditworthy counterparties can be financed, limits the margin of advance to 85% of the value of the contract to be financed, and ringfences the cashflows from the receivables for the benefit of noteholders. The ratings reflect the blended risk of Nam Fatt’s performance risk on the projects as a contractor, which MARC has assessed as moderate, and the low settlement risk on the receivables under the financed contracts. The developing outlook on the ratings reflects the measures that management has put in place to counter the decline in its cash flow and credit protection measures.

Listed on the Main Board of Bursa Malaysia, Nam Fatt, is primarily involved in construction & engineering and property development. As at 31 March 2007, the Group’s outstanding order book stood at approximately RM1,082.0 million having been significantly enhanced by the recently secured KIC Petroleum Terminal project valued at RM550 million. Domestic projects contribute 75% of the Group’s outstanding order book while offshore projects account for the remaining 25%.

Nam Fatt has established a track-record for the timely execution of its projects, as demonstrated by its ability to replenish its order book. Nam Fatt is moving away from a conventional volume led strategy towards a total solution strategy that would support better utilization of its existing assets, and higher EBIT levels. Based on its current outstanding order book, MARC expects that Nam Fatt should be able to better its operating margins. The above positives are, however, tempered to a certain extent by increasing competition within the construction sector and its consequent pressure on margins and the negative impact of further collection delays from any large project under its current order book.

The group’s improved profitability in FY2006 is attributable to the better performance of its property division, which offset the weaker performance of its energy and construction (EPCC) division, as reflected in its operating margins of 8.2% (FY2005: 4.4%). This was, however, moderated by the hefty increase in receivables and amounts due from contract customers. MARC’s concerns with the latter relate to the protracted nature of variation order claims for its Sudan Melut Basin project.

Given Nam Fatt’s manageable short-term debt maturity schedule, liquidity is expected to remain satisfactory; however, increasing working capital requirements could be a concern if operating cash flow generation continues to be weak. Liquidity risk is mitigated to a large extent by the availability of unutilized banking lines and the company’s moderate capital structure (RM125.0 million has been utilized under the facility thus far) which provides some headroom for additional borrowings. Management has informed MARC that it has introduced measures to address its weak operating cash flows and expects positive results by 3Q2007. The rating outlook could be revised from developing to stable if Nam Fatt exhibits meaningful improvement in its cashflow measures as projected. Conversely, the outlook could be revised to negative if the company’s cashflow measures fail to exhibit adequate improvement.