MARC has revised its rating outlook on Leader Universal Holdings Berhad’s (Leader) RM150.0 million Murabahah Medium Term Notes (MMTN) Issuance Programme to stable from developing and affirmed the MMTN rating at AID. The rating outlook revision reflects easing concerns surrounding the impact of Leader’s equity financing requirement for the construction of its second power plant project in Sihanoukville, Cambodia on its credit metrics.

The US$170 million 100MW coal-fired power plant project, which will commence construction at end-2009 and is slated for completion by 2012, is expected to be undertaken on a 70:30 debt-equity capital structure with Leader’s equity investment estimated to be about RM180 million over the three-year construction period. Leader’s manageable debt maturities, debt burden reduction and consistent free cash flow generation should allow it to fund its equity financing requirements with internal cash flow. Leader’s affirmed rating is supported by its strong market position in the regional cables and wires industry, and improving operating profit margins and declining debt levels.

Moderating the rating is the sensitivity of the cables and wires sector to the volatility of raw material costs, and country risks in relation to its power plant operations in Cambodia. The track record has been instrumental in Leader’s ability to secure a second IPP concession which would allow the group to extend and enlarge its power-related earnings stream beyond 2015 when its first concession ends. The significant increase in Leader’s power generation capacity also underscores the huge demand for energy in the country, where current capacity is estimated at 400MW against a demand of 800MW. MARC believes that operations in a less developed economy like Cambodia would expose Leader to a higher level of operational risk, notwithstanding the country’s gradual transition to an open and more market-friendly economy in recent years.

Despite the increasing significance of its power generation business, which contributes about 8% and 38% to revenue and operating profits respectively in the financial year ending December 31, 2008 (FY2008), the group’s mainstay remains its cable and wires business. As a dominant player in the cables and wires industry in Malaysia as well as in Southeast Asia, Leader is well-placed to benefit from the economic recovery in the region that may gather pace with the implementation of several large scale infrastructure-related projects under the government stimulus programmes.

The decline in copper and aluminium prices subsequent to an escalation of commodity prices in the first half of 2008 has contributed to a significant reduction of its working capital requirements and improved cash flow generation. The group has been able to generate free cash flow in excess of RM100 million per annum in the last two years.  For FY2008, Leader registered a 7.94% increase in pre-tax profit to RM102 million compared to FY2007, while operating margins rose to 5.27% (FY2007: 4.39%).

For 1HFY2009, the group registered lower revenue and pre-tax profit of RM918.8 million (1HFY2008: RM1,318.0 million) and RM42.0 million (1HFY2008: RM54.8 million) respectively on account of lower copper and aluminium prices which has fallen 45% and 49.5% respectively against the corresponding period in the previous year. Operating profit margin was higher at 5.12% against 4.98% in 2QFY2008, but lower compared with the previous quarter of 5.99%. The fall in commodity prices has also reduced working capital requirements and short-term borrowings, as reflected in Leader’s debt-to-equity ratio which has fallen to 0.49 times from 0.71 times as at end-FY2008.

With planned debt reduction of RM40 million by January 2010, Leader’s debt-to-equity level is expected to decline further. As at 1HFY2009, Leader has RM204.6 million in cash and bank balances. The final repayment of RM50 million under the MMTN facility is due in 2011, and MARC expects Leader to be able to meet its financial commitment given its strong cash generating ability underpinned by a stable cables and wires business.

Contacts:
Rajan Paramesran 03-2090 2233/ rajan@marc.com.my;
Francis Xaviour Joe 03-2090 2279/ fxjoe@marc.com.my