MARC has reaffirmed the MARC-2ID /AID short-term and long-term ratings respectively of second-tier automation and material handling solution provider, Malaysian AE Models Holdings Berhad’s (MAE) RM200 Million Islamic Commercial Paper/Islamic Medium-Term Notes (ICP/IMTN) programme. The ratings carry a developing outlook. The reaffirmed ratings reflect MAE’s strong operating performance, sustained order book and its fairly established competitive position in overseas markets. These strengths are moderated by its exposure to rising raw material prices and the industry’s susceptibility to adverse economic conditions. Additionally, MAE’s financial flexibility has been weakened by its continuing negative cash flow from operations and heavy reliance on bank borrowings to fund working capital requirements. MAE is at an advanced stage in its plans to refinance the ICP/IMTN programme by February 2008. The developing outlook acknowledges the group’s commitment to address liquidity and working capital concerns by way of a capital raising and refinancing exercise, targeted for completion by February 2008.

MAE continues to position itself as a one-stop automation and material handling solution provider and has developed a niche in medium-sized projects. MAE’s operating track record has enabled it to secure contracts from established international manufacturers. MAE has also expanded its marketing presence and currently has a total of sixteen marketing offices and three representative offices spread across South East and East Asia, Australia and Europe. The group had an outstanding order book of RM273.7 million as at October 2007, which is consistent with 2006 numbers. MAE is currently focusing on China and Indonesia to further grow its order book. Of its current outstanding order book, more than 75.0% is derived from overseas markets with Indonesia, Singapore and Japan accounting for 53.0%.

MAE recorded commendable revenue and profit growth in the past five years. The group registered a 31.6% growth in revenue to RM377.5 million and 22.9% growth in profit before tax (PBT) to RM22.9 million in FY2007. Its revenue and PBT in the first quarter of FY2008 grew by 45.8% and 62.0% respectively year-on-year, buoyed by a steady world economy and commodity boom.

Longer receivables collection period, cash on delivery payment terms on machinery and parts for big projects and retention deposits to cover project warranties have resulted in large working capital outflows and continuing negative cash flow from operations. Additionally, cash flow measures have showed further weakening with a recent significant debt maturity in the absence of new funding.

MAE’s present available liquidity includes RM25.3 million in cash and cash equivalents and RM46.0 million of undrawn ICP/IMTN facilities. To partially address its growing working capital needs, the group recently completed a private placement exercise which raised RM12.96 million. To address its requirements over the longer term and ease funding pressures, the company is planning an equity raising exercise in addition to its proposed restructuring of the ICP/IMTN programme. Failure to proceed with the refinancing exercise will result in downward rating pressure in the absence of any mitigating developments and/or initiatives.