MARC has downgraded its short-term rating on Persoft Systems Sdn Bhd’s (“PSSB”) RM50 million Commercial Papers Programme (“CP Programme”) to MARC-3 from MARC-2 and maintained its MARCWatch Negative on the rating. The lowered rating reflects PSSB’s weak liquidity position exacerbated by long outstanding receivables and declining margins in its core business of software licensing as well as heightened concerns of further pressure on liquidity from maturing CPs amounting to RM18.0 million in December 2008. The rating downgrade will relieve the existing underwriter of the CPs from its obligation to continue underwriting the CPs and will expose the CPs to rollover risk pending PSSB’s plan to fully redeem all outstanding CPs totalling RM20.0 million by February 2009 through proceeds from asset sales and internally generated funds.

The rating remains on MARCWatch Negative to highlight the likelihood of a further downgrade in the near-term in the event PSSB’s plan fails to materialise. The CP Programme was initially placed on MARCWatch Negative on August 21, 2008, following PSSB’s breach of its minimum required debt service cover ratio of 1.25 times based on its financial year ended December 31, 2007 (FY2007) audited results. The breach was rectified on October 10, 2008, following repayments of outstanding amounts due from its holding company and sister company – Persoft Corp Sdn Bhd (PerCorp) and Persoft Properties Sdn Bhd - amounting to RM2.6 million. Notwithstanding, MARC continues to view the sizeable amounts owed by related entities with concern. As of September 30, 2008, total related company advances stood at RM16.8 million, with no fixed term of repayment.

PSSB, a wholly owned subsidiary of PerCorp, manages licensing services for developer applications and products including related technical consulting and training, in addition to providing solutions to clients running on the open source technology platform. The company has been a large account reseller (LAR) for Microsoft (Malaysia) Sdn Bhd for the past 15 years and has a large customer base comprising government agencies, government-linked companies and public listed companies. 

PSSB’s profitability is primarily volume-driven due to the small margins of software licensing and the highly competitive nature of the business. For FY2007, PSSB’s operating margin worsened to 2.6%. The lower margin was recorded in spite of an 11.6% increase in revenue, as unexpected increases in purchasing and staff costs eroded margins, resulting in an 11.6% fall in operating profit. Nevertheless, PSSB’s nine months’ results as at September 30, 2008 (3QFY2008) showed an improvement in operating margin to 3.6%. 

The company’s cash flow from operations has been negative for the last two years, a consequence of declining operating profits, lengthy collection periods and large advances to its holding company. Collection performance of trade receivables also weakened, with 86.4% of receivables aged over 90 days old as at September 30, 2008. As such, improving collection performance is critical to strengthening PSSB’s liquidity position.

The company’s total borrowings as at end FY2007, stood at RM21.2 million, while its debt to equity ratio stood at 1.92 times (FY2006: 1.92 times). The company’s marginally reduced debt to equity ratio of 1.89 times based on its unaudited 3QFY2008 results, remains in compliance with its 2.0 times gearing cap under the facility. Any subsequent rating action to be taken by MARC will depend on rollover risk in relation to the CPs and progress made by PSSB with respect to its plan to fully redeem the CPs.  

Contacts:
Azlina Mohamed Noor Beg, 03-2090 2254/ azlina@marc.com.my;
Afidah Shahbudin, 03-2090 2269/ afidah@marc.com.my