MARC has reaffirmed its MARC-2 / A ratings of TH Group Berhad’s (THG) RM200 Million Commercial Papers/ Medium-Term Notes (CP/MTN). The ratings carry a developing outlook. THG is mainly involved in the cultivation and management of palm oil estates, contracting services (construction and coal mining), technology, healthcare sector and venture capital. The ratings reflect THG’s plantation division steady performance supporting the declining profitability across its diverse businesses.  The developing outlook reflects THG’s evolving business profile as a result of a shift in the focus of the construction division towards project management as well as its venture into coal mining. The outlook highlights the uncertainties concerning the longer term credit effects of the foregoing on THG’s operating performance and cash flow generation. 

In FY2006, THG’s construction division incurred a segment loss (before interest) of RM30.0 million after making a RM33.0 million provision. A further provision was made in September 2007 amounting to RM17.7 million. THG is reducing its exposure to the construction-related risks by assuming more of a project management role in its projects while continuing to bid for projects to bolster its order book. As at September 2007, THG’s construction division has an outstanding order book of projects valued at RM73.6 million which will last at least until 2009. Meanwhile, its coal mining operations which were supposed to commence by end-2007 were delayed as a result of licensing issues. THG is expected to resolve the licensing issues by early 2008. The delay in the commencement of coal mining operations beyond earlier expectations would constrain near-term improvements in revenue and earnings. The coal mining operations are expected to provide meaningful contributions to THG’s revenue and earnings base, going forward.

THG’s strong operating performance in FY2006 was held up by revenue from the plantation division in excess of RM166.4 million and segment profit (before interest) of RM63.2 million, boosted by high average palm oil prices. THG’s plantation division remains the largest revenue contributor to the Group, accounting for more than 50% of the Group’s total revenue annually. THG’s healthcare and venture capital divisions continued to record segment losses (before interest) of RM6.2 million and RM11.2 million respectively in FY2006. THG plans to exit from its loss-making businesses once it is able to realise appropriate market values on divestment.

Despite higher revenue of RM241.4 million (Q3FY2006: RM216.5 million), THG recorded a pretax loss of RM2.3 million (Q3FY2006: RM45.1 million deficit) for the nine months period ending September 30, 2007, largely due to the RM17.7 million provision made. Reflecting higher average palm oil prices since January 2007, THG’s plantation segment recorded higher revenue at RM179.0 million with profit (before interest) of RM59.4 million, offsetting the weak performances of its other business divisions. THG’s debt servicing capacity is backed by its cash and bank balances of RM18.3 million as at September 2007. THG was in compliance with its maximum permitted gearing ratio of 1.25 times. The Group’s gearing ratio of 0.93 times as at September 2007, provides some headroom for THG to fully utilise its undrawn bank facilities totalling RM83.8 million as of September 2007. 

Deterioration in THG’s financial performance or failure to monetize its non core investment holdings in a timely manner and generate sufficient proceeds therefrom will exert pressure on the existing ratings.