Press Releases MARC UPGRADES DEGEM BERHAD’S (DEGEM) SHORT-TERM RATING TO MARC-1ID AND AFFIRMS ITS LONG-TERM DEBT RATING AT AID

Monday, Nov 05, 2007

MARC has upgraded Degem Berhad’s (DeGem) short-term rating and affirmed the long-term rating for its RM50.0 million Murabahah Partially Underwritten Notes Issuance Facility / Islamic Medium Term Notes (MUNIF/IMTN) at MARC-1ID/AID. The ratings carry a stable outlook. The upgrade of the short-term rating reflects increased consideration given to industry and company-specific liquidity characteristics. The ratings reflect the Group’s improved financial profile subsequent to the completion of a corporate restructuring exercise carried out in FY2006, and its steady expansion domestically and internationally. Following the restructuring exercise which saw the Group withdraw from the yellow gold jewellery segment, the Group is focusing on the sale of diamonds, gemstones and white gold.

The stable rating outlook is premised on expectations of sustained financial performance, supported by the Group’s expansion plans and aided by a favourable industry outlook.

The DeGem Group is involved in the manufacturing and trading of jewellery. It markets two distinct brands, the DeGem brand which caters for the middle to high end segment of the market and its Diamond & Platinum (D&P) brand which focuses on the younger consumer segment. The DeGem outlets contributed 65% of the Group’s total revenue in FY2006 while its D&P outlets accounted for the remaining 35% of revenue. DeGem also has the sole distributorship for Lazare Diamonds and Faberge in Malaysia. The Group currently has 19 outlets, of which, 7 market the DeGem brand with the remaining 12 representing the D&P brand. Of the 12 D&P outlets with the exception of one in Brunei, the rest are locally situated. As part of its international expansion, the Group opened its DeGem outlets in Jakarta, Indonesia and in Singapore, one in each location, and launched a Design and Distribution unit in Hong Kong in the fourth quarter of 2006. In September 2007, the Group opened another two DeGem outlets in two new upmarket shopping galleries in the Klang Valley.

For FY2006, the Group registered an adjusted pre tax profit of RM14.3 million on the back of RM143.9 million in revenue, reflecting year-on-year growth rates of 79% and 33% respectively. The improved performance was due to increased sales volumes of its higher margin products, diamonds and gemstones, which comprised 90% of its sales mix. Owing to higher sales and tighter cost control, the Group’s adjusted operating margins returned to double digit levels of 11.4% (FY2005:8.5%). The Group’s export sales have been on an increasing trend for the past four years, achieving 13.8% in FY2006 (FY2005:10.6%). For the first half of FY2007, the Group registered pre tax profit of RM8.9 million on the back of RM69.7 million in revenue, with marginal year-on-year increases of 4.4% and 1.6% respectively. During the same period, the Group’s export sales increased as a percentage of total sales to 23.2%, in tandem with the Group’s entry into the Singaporean and Indonesian markets. MARC expects the Group to maintain its earnings performance in the second half of FY2007.

The Group generated higher net operating cash flow in FY2006 to RM19.3 million (FY2005:RM4.3 million). Meanwhile, its trade payables rose on account of the run-up in inventory prior to the commencement of its Hong Kong operations in December 2006. The Group’s gearing level was maintained at 0.4 times in the first half of 2007 (FY2006: 0.4 times). The Group is not expected to have any significant debt maturities until June 2008.

The Group’s financial flexibility is strengthened by the liquidity of its diamond inventory. As at June 2007, 56% or RM81.5 million of the Group’s inventories comprised diamonds, which are easily tradable.