MARC has downgraded its rating of Haisan Resources Berhad (HRB)’s RM30 million Bonds to A- from A. HRB’s rating remains on MARCWatch Negative where it had been placed on August 20, 2008 in light of its continued breach of its debt-to-equity covenant, and its weak first half year 2008 performance which was significantly below expectations. The MARCWatch placement also reflects uncertainty surrounding the timing and the value of proceeds that will eventually be received for its disposals of non-core assets pursuant to its proposed regularisation plan. HRB also expects to utilise up to RM8 million from a sale-and-leaseback of a cold room facility, in addition to its RM18 million bond sinking fund balance, to partially redeem its RM30 million outstanding Bonds. The downgraded rating, meanwhile, reflects MARC’s view that HRB’s credit measures are no longer adequate for the ‘A’ rating level and that the timing of any recovery of its credit measures to levels appropriate for the previous rating is uncertain given the lack of earnings and cash flow visibility for its new China operations.

HRB was incorporated in 1999 and is principally involved in the whole spectrum of the refrigeration and ice industry, which includes provision of temperature controlled logistics (TCL) services and provision of engineering services related to industrial refrigeration as well as ice manufacturing and warehousing. Despite its relatively good competitive position in the domestic refrigeration and ice industry, HRB’s financial risk profile has weakened as a result of major debt-funded capital expenditure in recent years with respect to its expansion into China and the lack of corresponding improvement in its operating performance.

HRB recorded a pre-tax profit of RM2.0 million for the six months ending June 30, 2008 (1HFY2008). This is RM9.5 million lower than its performance in 1HFY2007 (RM11.5 million). The weaker financial performance in 1HFY2008 is largely due to fewer engineering projects undertaken, a continued rise in raw material costs and higher finance costs.

HRB’s credit protection measures remain strained. The group has reported negative free cash flow for the past few years as a result of its aggressive debt-funded expansion. Its poor performance in 1HFY2008 inhibited improvement in its debt-to-equity ratio, which remained elevated at 2.5 times and above its covenanted level of 2.0 times.

MARC believes that the progress of the regularisation plan over the next few months will be critical to the rectification of its covenanted breach and to a favourable resolution to our MARCWatch placement. Further deterioration in its credit profile and financial measures could be detrimental to the current rating. 

Contacts:
Khairul Muzamel Perera, 03-2090 2247/ kevinkhairul@marc.com.my;
Elea Nor Zainal, 03-2090 2263/ elea@marc.com.my