MARC has revised its outlook to positive on Atlan Holdings Bhd’s (Atlan) MARC-2ID/AID ratings of its RM90.0 Million Murabahah Underwritten Notes Issuance Facility/Islamic Medium Term Notes (MUNIF/ IMTN). The outlook revision follows the announcement of Atlan’s forthcoming acquisition of the entire business undertakings of Naluri Corporation Berhad (Naluri) including all its assets and liabilities for a total cash consideration of RM435.4 million. Naluri is currently a 38.06% associate company of Atlan. Naluri’s principal activity is trading duty-free goods and non-dutiable merchandise through 64.57% owned subsidiary, DFZ Capital Berhad (DFZ). Apart from duty-free trading and retailing, Naluri is also involved in property investment and development, hospitality and autoparts manufacturing. MARC expects significant change in Atlan’s business profile post-acquisition. Duty-free merchandise retailing is expected to dominate in terms of revenue and earnings generation. The increased scale and diversification of Atlan’s income base is likely to offset the negative impact of financial transactions associated with the planned acquisition on the credit metrics of Atlan. The MARC-2ID/AID ratings on the MUNIF/IMTN remain unchanged and reflects no immediate effect on Atlan’s credit quality. The affirmed ratings reflect Atlan’s competitive position in the precision engineering business as well as retail and trading, the continued stable performance of these businesses and its commitment to retaining strong credit protection measures.

Atlan is involved in the businesses of manufacturing of precision mechanical products, tools and dies and duty free operation through its subsidiaries and associates. Atlan’s manufacturing operations serve economically diverse industry sectors which include the electrical and electronics, computer, automotive and medical devices. High switching costs, a consequence of significant tool making and design costs, discourage customers from switching to other manufacturers.

Atlan’s involvement in the retailing of duty-free and non-dutiable merchandise was previously represented by Emas Kerajang Sdn Bhd (EKSB) which owns and operates a duty free complex at Pekan Padang Besar, Perlis, and DFZ, Naluri’s principal operating subsidiary. DFZ is the largest duty-free operator at the Malaysian-Thai border of Peninsular Malaysia. On January 8, 2008, Atlan completed its divestment of its entire equity interest in EKSB to DFZ for a total cash consideration of RM40 million. In addition to EKSB’s duty-free complex at Pekan Padang Besar, Perlis, DFZ has a total of 18 duty-free outlets/complexes and wholesale outlets at various locations in the country including Kuala Lumpur International Airport, Bukit Kayu Hitam and Johor Bahru.

For the nine months ended September 30, 2007, Naluri reported a pre-tax profit of RM18.45 million, marginally higher from the same period in 2006, and cash flow from operations (CFO) of RM45.62 million, compared with RM34.29 million in the same period in 2006. Its duty-free operations generated segment pre-tax profit of RM33.23 million (FY2006: RM29.68 million). As at September 30, 2007, the Group’s borrowings stood at RM52.64 million.

For the financial year ended 28 February 2007, Atlan registered an increase of 16.6% in revenue from its continuing operations to RM134.2 million, which largely reflects the improved performance of its retail and trading division. Notwithstanding, Atlan posted a loss before tax from its continuing operations of RM120.3 million as a result of impairment losses totalling RM72.3 million in FY2007, relating to its RM32.2 million impairment of investment in Naluri and RM40.1 million impairment of goodwill. Atlan’s share of losses in Naluri during the same period amounted to RM58.0 million. Excluding the exceptional items, Atlan’s profit before tax, operating profit margin and return on equity would have registered RM9.9 million, 12.0% and 5.2% respectively.

Atlan maintained compliance with its finance service cover ratio (FSCR) covenant of 1.50 times in FY2007 with a FSCR of 3.14 times. The Group has pared down its long-term borrowings in recent periods with the benefit of proceeds from its disposal of subsidiary, Courseville Holdings Limited. As at August 31, 2007, the Group’s debt to equity ratio improved further to 0.29 times, well below the covenanted maximum gearing cap of 1.5 times. For the six month period ended August 31, 2007 (1H08), Atlan’s financial performance was moderate with a pre-tax profit of RM2.2 million. MARC is of the view that the group will be well positioned to deliver a significant uplift in revenue and earnings generation upon completion of Atlan’s acquisition exercise.