MARC has affirmed ratings of A+ID / MARC-2ID to Capable Aspect Sdn Bhd’s (CASB)  RM40 million Islamic Medium-Term Notes Issuance Facility/ Murabahah Underwritten Notes Issuance Facility (‘IMTN/MUNIF) respectively. The ratings carry a stable outlook. The ratings for CASB principally reflect the low risk business profile, strong financial performance and improved credit protection measures of its wholly-owned subsidiary, Sinagama II Technologies Sdn Bhd (SSB), a leading domestic contract sterilization service provider. Offsetting these credit positives are its high debt leverage position, heavy capital spending commitments which will constrain free cash flow generation, and the competitive challenges faced by its non-core logistics business. 

CASB was created to issue bonds to fund the acquisition of SSB. SSB, through its subsidiaries, provides gamma and ethylene oxide (Eto) sterilization and decontamination services mainly for medical devices. Its wholly owned subsidiary, Sterilgamma Logistics Sdn Bhd (SGL), provides logistics support to the Group’s end customers.

SSB benefits from a strong business risk profile, mainly as a result of the high entry barriers in the sterilization services industry. Sustained demand for sterilization services saw its Gamma division’s volume processed reaching a record high in year 2007 of 81,225 cubic metres against 76,828 in the previous year. This trend is expected to continue in the short to intermediate term. SSB’s Eto division, however, recorded a decline in year 2007. Nevertheless, the demand for Eto sterilization is expected to recover in the near term. Apart from increases in volume processed, SSB’s ability to raise prices for Eto and Gamma sterilization services underpins its low risk business profile.  SSB managed to increase the average prices for gamma irradiation by 13% and Eto irradiation prices increased by 2% in 2007. Further increases in price are likely in the short to intermediate term.

Profitability measures remained strong in year 2007 despite revenue remaining flat on account of the weaker performance by its non core business division. Nevertheless, operating margin aided by higher selling prices and volume, expanded strongly to 26.68% as compared to 19.69% in the previous year. SSB’s debt service coverage ratios showed improvement, however, higher capital expenditure and dividend paid resulted in a reduced free cash flow generation. Capital expenditure commitments are expected to remain elevated in year 2008 amounting to RM6 million before stabilizing at RM3 million to RM4 million from year 2009 onwards. CASB’s debt to equity ratio of approximately 5 times remains high for its current rating level.

The stable outlook reflects MARC’s expectation that SSB will maintain its business and financial risk profile in the near to intermediate term. A revision of its rating outlook to negative could likely arise if the profitability of its core business and cash flow measures show any signs of weakening.