MARC has affirmed the short- and long-term ratings of MARC-2/A+ on Asia Brands Corporation Berhad’s (ABC) RM70.0 million Commercial Papers/Medium Term Notes (CP/MTN Programme) respectively. The outlook for the ratings is maintained at stable. The rating action is premised on ABC’s strong competitive position in the domestic baby products and ladies’ undergarment market segments, its nationally well recognised brands, its strong cash flow generation and its ability to maintain good operating profit margins in the competitive apparel industry. These ratings are tempered by the group’s rising inventory levels reflecting a weaker retail environment and the sharp increase in its debt leverage.

ABC markets a broad array of baby products, children’s apparel and ladies’ undergarments principally under the Anakku and Audrey brand names. Its products are targeted at middle-income households and individuals. Management believes that ABC has an estimated annual market share of approximately 50% and 20% in the baby product and ladies undergarment market segments respectively. MARC considers ABC’s primary competitive strengths to be its strong brand recognition, flexible cost structure and its extensive distribution network. The group’s products are sold in major departmental stores and hypermarkets throughout the country. The group also operates a total of 121 retail boutiques, the majority of which are Anakku outlets. By outsourcing its manufacturing operations, the company has been able to maintain relatively low levels of fixed overheads and operating costs.

For financial year ended March 31, 2009 (FY2009), ABC’s revenue uptrend continued but at a lower pace of 8.5% (FY2008: 14%). Given the sharp increase in marketing costs in FY2009 to promote sales amid the retail downturn, selling and distribution costs rose to RM68 million (FY2008: RM60.9 million), and operating profit before interest and tax (OPBIT) declined to 10.7% (FY2008: 14%). The group’s overall performance in FY2009 was also impacted by a sharp increase in borrowings to RM61.5 million (FY2008: RM9.9 million) to support its inventory purchases. Inventory, rose by a hefty 47.5% to RM60.9 million in FY2008 (FY2007: RM41.3 million) due to anticipated strong consumer demand. As a result, the group incurred higher financing costs that lowered its profit before tax to RM17.1 million in FY2009 (FY2008: RM23.8 million). Of some concern is the potential for inventory-related charges arising from the substantial build-up in ABC’s inventory in coming quarters.

Because of the significant rise in borrowings and a decline in ABC’s shareholders’ funds following a sizeable RM45 million dividend payout, the group’s debt-to-equity (DE) level rose to 0.75 times in FY2009 (FY2008: 0.09 times). The dividend payout was initiated after the company became private after undertaking a voluntary delisting exercise from Bursa Malaysia in FY2008. MARC does not expect the continuation of an aggressive dividend policy by ABC. The current ratings incorporate the expectations of only moderate dividend payouts and that ABC will generate sufficient after-tax cash from operations to fund its growth-related spending.

Despite an increase in the group’s cash flow from operations to RM21.1 million in FY2009 (FY2008: RM4 million), its cash flow coverage declined mainly due to higher interest paid in relation to the drawdown of the CP/MTN facility. Cash and cash equivalents increased for the third consecutive year to RM16.9 million in FY2009.

The stable outlook reflects MARC’s expectation that ABC’s earnings performance will be largely sustainable, its cash flow generation would remain satisfactory relative to leverage and debt service, and that leverage would be progressively pared down.

Contacts: 
Benjamin Yab  03-20902270/ benjaminyab@marc.com.my;
Nisha Fernandez 03-20902269/ nisha@marc.com.my;
Rajan Paramesran 03-20902233/ rajan@marc.com.my