MARC has downgraded Boon Koon Group Bhd’s (BKGB) long-term rating to A-ID from AID and affirmed its short-term rating at MARC-2ID with respect to its RM100 million Islamic Commercial Papers/ Islamic Medium Term Notes (ICP/IMTN). The ratings carry a negative outlook. The downgrade reflects the group’s weakened competitive position arising from unfavourable changes to the import quota regime for used commercial vehicles in Indonesia and registration regulation in its home market of Malaysia, its lengthening cash conversion cycle amid rising inventories and trade receivables, and the modest headroom for debt leverage under covenants of the ICP/IMTN. The negative outlook, meanwhile, reflects a deterioration of its market prospects for rebuilt commercial vehicles and the continuing lack of trading visibility.

BKGB is currently the only listed commercial vehicle rebuilding company in Malaysia, competing with 14 other non-listed players. The group’s leading position in the rebuilt commercial vehicles market has been significantly eroded, following the liberalisation of registration for used commercial vehicles. BKGB has responded to the rapid increase in the number of new entrants into this segment by downsizing its commercial vehicle rebuilding business in East Malaysia. Similarly, the group has wound down its unprofitable business in Indonesia due to the loss of its import quota for used commercial vehicles previously allocated to BKGB by the Indonesian government. The group has recognised about RM1.6 million of its estimated operating losses of RM4.0 million incurred in connection with the downsizing of its East Malaysian operations and closure of its Indonesian operations as of June 30, 2008.

For the financial year ended December 31, 2007 (FY2007), the group recorded a 20.6% growth in revenue to RM204.6 million mainly due to the additional contribution from its material handling equipment division. Based on its half-year unaudited results, BKGB recorded revenue of RM91.3 million and pre-tax profit of RM3.26 million, reflecting lower sales of rebuilt commercial vehicles. The group’s negative operating cash flows and cash flow coverages in FY2007 reflected lower earnings and heavy capital expenditure. Its free cash flow generating ability could be further impeded in fiscal 2009, stemming from the group’s plan to construct a new production facility in Johor, at an estimated cost of RM9.3 million.

Inventory turnover showed a slight improvement to 220 days in 1HFY2008 from 236 days in FY2007 largely due to slower vehicle rebuilding activity with a view to reduce inventory levels of rebuilt vehicles. However, payment collection as measured by days receivables deteriorated to 187 days in 1HFY2008 from 135 days in FY2007 on account of the longer credit period extended to BKGB’s customers in respect of batch sales.

In FY2007, BKBG’s debt to equity (D/E) ratio increased to 1.51 times (x) following the drawdown of RM35 million from the ICP/IMTN facility which was utilised for working capital and refinancing. This led to a breach of its D/E covenant of 1.50x which it subsequently rectified by repaying certain of its total borrowing. As of June 30, 2008, BKGB’s D/E ratio was 1.44x. Given its modest headroom for further debt leverage, the group would derive limited financial flexibility from its unencumbered assets and unutilised credit lines of RM63.4 million and RM119.9 million respectively as of September 30, 2008. The group’s cash and bank balances totalling RM13.2 million, inclusive of the balance in the Finance Service Account (FSA) is viewed as sufficient to service its immediate debt obligations. 

Contacts:
Hafizan Haron, 03-2090 2238/ hafizan@marc.com.my;
Chong Mei Ghee, 03-2090 2274/ meighee@marc.com.my