MARC has affirmed its rating of MARC-1ID / A+ID on Nam Fatt Corporation Berhad’s (Nam Fatt) RM250 million Islamic Commercial Paper/Islamic Medium Term Notes Programme (ICP/IMTN). The affirmed ratings reflect the structural protections afforded to noteholders under the rated facility. Working capital availability is governed by prescribed advance rates for eligible contracts and cashflows from the corresponding receivables are ringfenced to meet the debt service payment obligations of the notes. The eligible contracts which are all with creditworthy customers provide a high degree of cash flow certainty. The rating also factors in Nam Fatt’s positive track record as a construction and engineering company and consequently, low performance risk on eligible contracts financed by the rated facilities, moderated somewhat by sharply lower earnings for financial year ended December 31, 2007 (FY2007) and margin pressure. MARC notes that a meaningful percentage of Nam Fatt’s outstanding contracts are fixed-price which would expose it to margin pressure in the current environment of rising construction material costs. The continuing developing outlook reflects pressure on Nam Fatt’s credit and financial profile which is currently offset by the stable credit quality of receivables under contracts financed by the ICP/IMTN. If subsequent developments indicate increased risk of time and/or cost overruns on eligible contracts financed, MARC’s assessment of the ratings may be affected.

Bursa Malaysia-listed, Nam Fatt is mainly involved in construction & engineering and property development. As at June 30, 2008, two contracts - RM514.68 million Petroleum Hubs & Bunkering Facility project and RM207.7 million National Housing Authority of Thailand (NHA) residential units project - accounted for 65% of its net outstanding order book of RM1.1 billion. These contracts are expected to contribute to revenue and earnings for the group over the next two years, although untoward developments arising from political uncertainty in Thailand could impede construction progress.

For FY2007 the group registered a 16.7% and 66.1% year-on-year decline in revenue and pre-tax profit to RM570.9 million and RM11.6 million respectively despite a non-recurring net gain of RM26.1 million from the disposal of its toll bridge operations in China. Contributing to the decline in profit were delays in commencing work on new contracts and the completion of contracts which were already at the tail end of construction. Net cash flow from operations (CFO) registered a larger deficit of RM82.9 million in FY2007 (FY2006: RM76.8 million) as a result of increased working capital requirements to fund contract receivables. The company’s reliance on external financing to fund its increased working capital resulted in a higher gearing level of 0.90 times in FY2007 (FY2006: 0.60 times). As at December 31, 2007, the group maintained a comfortable FSCR of 11.6 times against minimum covenanted level of 1.50 times.

For the first six months period ended June 30, 2008 (1HFY2008), the group registered a marginal 2.8% increase in revenue to RM312.6 million compared to corresponding period last year of RM304.0 million. Pre-tax profit continued to decline to RM10.9 million (1HFY2007: RM15.9 million) mainly attributed to timing issues of its construction revenue recognition. Net CFO showed signs of turning around in 2QFY2008 after nine quarters of being in deficit with cashflows coming in from the Petroleum Hubs & Bunkering Facility and U-Thant high-end property projects.

Nam Fatt’s ability to achieve or sustain positive cashflows will be challenged by the weaker outlook for construction activity, margin pressures, increased political risks with respect to its Thailand project and a lengthening cash conversion cycle. The group’s access to unutilized banking facilities and available cash balances of RM65.8 million as at June 30, 2008 is expected to provide sufficient liquidity in the immediate to intermediate term. Going forward, a revision in the rating outlook to stable from developing is conditioned upon the timely implementation of its major projects and improvement in Nam Fatt’s internal cashflows and earnings performance.

Contacts:
Khairul Muzamel Perera, 03-2090 2247/ kevinkhairul@marc.com.my;
Francis Xaviour Joe, 03-2090 2279/ fxjoe@marc.com.my