MARC has affirmed the rating of MARC-2ID for Prinsiptek Corporation Berhad’s (Prinsiptek) Murabahah Commercial Paper (MCP) Programme of up to RM30 million. The negative outlook for the rating is maintained.  The affirmed rating reflects recent progress albeit slow, made in collecting its past due receivables, meaningful reduction in its debt burden and an order book position which provides earnings visibility over the next two years. These improvements are counter-balanced by the decline in Prinsiptek’s available liquidity, and MARC’s concerns over its ability to restore its operating margins to around levels as of FY2007 in a challenging operating environment. The negative outlook reflects MARC’s view that Prinsiptek’s credit metrics will continue to be weak for a MARC-2 short-term rating and risk of renewed pressure on Prinsiptek’s liquidity remains given the countercyclical nature of its working capital needs and the sizeable overhang of long-outstanding receivables.

Prinsiptek is involved in construction and property development through its subsidiaries. In FY2008, Prinsiptek generated 90% of its revenues from construction activity, which is recovering from subdued levels. Prevailing weak market sentiments have led the group to defer new property launches and to rely primarily on cash flow generated by its construction operations to fund debt amortization. As at June 30, 2009, Prinsiptek’s construction order book of about RM443.22 million provides sufficient earnings visibility until at least FY2011. Of this, 52% relates to government-related contracts. These contracts are expected to provide the cash flow to meet its near-term financial commitments. Prinsiptek’s overseas project in Thailand, comprising a RM194 million low cost housing project in Bangkok from the National Housing Authority of Thailand and another commercial residential project in Bangkok with a gross development value (GDV) of RM71.93 million are expected to provide a small but steady revenue contribution in the near- as well as-medium term. However, there is a lack of long-term visibility due in part to the weak recovery in the construction sector, which is in part attributable to the spillover from weaker housing activity.

For the financial year ended December 31, 2008 (FY2008), Prinsiptek reported sharply lower revenue and pre–tax profit of RM119.6 million (FY2007:RM217.3 million) and RM4.6 million (FY2007: RM21.8 million) respectively. Reflecting the  countercyclical nature of the group’s  working capital cash flows in addition to the focus on  collecting past due receivables, net cash flow from operations (CFO) improved to RM28.4 million in FY2008 (FY2007: RM8.9 million). This, and Prinsiptek’s positive net CFO of RM31.8 million funded the company’s repayment of a RM50 million loan in June 2009. Consequently, its leverage, as measured  by its debt-to-equity ratio, dropped to 0.73 times as at June 2009 compared to a high of 1.16 times in FY2007.

Prinsiptek’s persistently high trade receivables, a continuing rating concern, also declined to RM214 million as at end 1HFY2009 compared to RM293.2 million in FY2007. Its sizeable past due receivables warrants active resolution in order to avoid write-offs, which could materially impact its profitability. For 1HFY2009, revenue increased to RM73.02 million (1HFY2008: RM54.6 million) but pre-tax profit declined to RM2.09 million (1HFY2008: RM7.45 million) mainly on account of lower margins for most of its projects.

Prinsiptek has recently revised the principal terms and conditions of the MCP Programme to enhance the security package for noteholders and to bring forward its redemption of the issue. The new redemption profile requires the debt to be amortised over five years beginning from December 2009 as opposed to the original scheduled redemptions of RM10.0 million and RM20.0 million in 2012 and 2013, respectively. The new amortisation schedule has been drawn up based on Prinsiptek’s expected cash flow generation. MARC expectations are the company should be able meet the upcoming December 2009 redemption amount of RM3 million.

Resolution of the negative outlook depends on management‘s ability to demonstrate sufficient improvement in its financial metrics, going forward.

Contacts: 
Rajan Paramesran 03-2090 2233/ rajan@marc.com.my;
Francis Xaviour Joe 03-2090 2279/ fxjoe@marc.com.my;
Janey Chock 03-2090 2264/ janey@marc.com.my