MARC has lowered Dawama Sdn Bhd’s (Dawama) RM120.0 million Senior and RM20.0 million Junior Sukuk Musyarakah Medium Term Notes Programme (Sukuk) to AIS and A-IS respectively from A+IS and AIS. The outlook for the rating has been revised to negative from stable. The rating actions are premised on Dawama’s weakened credit profile stemming from significant losses for the 17-month accounting period to September 30, 2009 as well as for the five-month period ending February 28, 2010. The extended period of poor results was brought about by the disruption to its five-year textbook revision cycle, which, in turn was the result of an unexpected policy change by the Ministry of Education (MoE). The poor operating performance has impaired cash flow generation and associated credit measures. Dawama is also burdened by its high fixed cost, a legacy of the privatisation programme of the former publishing division of government-owned Dewan Bahasa dan Pustaka (DBP) and main publisher of Malaysian school textbooks. The negative outlook on the ratings incorporate potential for a gearing covenant breach and expectations that Dawama’s earnings and cash flow generation will remain constrained in the current financial year.

Dawama holds the exclusive rights to print DBP’s publications, a government-owned body under the MoE, which is responsible for the publication of Malaysian school textbooks as well as other general titles. Dawama had obtained the rights to publications of school textbooks under a 12-year concession agreement between DBP and Dawama, ending in June 2014.  Dawama was allocated a significantly smaller number of new school textbooks in 2009 for the 2010 school year on account of syllabus changes introduced by the MoE following the ministry’s decision to revert to Bahasa Malaysia as the teaching language for science and mathematics in national schools. The delay in securing new textbook orders had an adverse effect on the company which receives 80% of its revenue from school textbooks publications. Dawama has now secured firm orders for the printing of new school textbooks for Primary One for the 2011 school year under the new national curriculum. The commencement of a new multi-year textbook revision cycle leads MARC to believe that Dawama is assured of textbook orders in subsequent years as the latest curriculum is gradually implemented to all grades/levels. 

Dawama maintains strong ties with its key shareholders, DTP Enterprise Sdn Bhd (51%) and Konsortium Dewan Edaran (M) Sdn Bhd (40%), both of which are distributors of Dawama’s non-textbook titles which currently constitute 20% of its revenues. MARC notes whilethe close relationship has provided operational continuity following Dawama’s inception, the relationship has also given rise to sizeable related-party transactions and high receivables.

For the 17-month period ending September 30, 2009 (FY2009), the company’s revenue declined to RM135.9 million, an annualised decline of 37.7% from the RM154.1 million registered in the 12-month period ending April 2008 (FY2008), attributed to the aforementioned delay in rolling out the new school textbooks. Consequently, Dawama recorded a pre-tax loss of RM30.0 million in FY2009 (FY2008: pre-tax profit of RM9.1 million). Dawama’s interim results in the five-month period ending February 28, 2010 showed further pre-tax losses of RM15.7 million on revenue of RM9.3 million.

Cash flow from operations (CFO) declined to RM4.4 million (FY2008: RM14.8 million), and CFO interest coverage decreased to 0.41 times (FY2008: 2.03 times), mainly on account of the change in financial year-end to September. As Dawama’s revenue is mostly recognized in the last quarter of its financial year ending September, its receivables rose to RM90.7 million in FY2009 (FY2008: RM41.0 million), and has since declined to RM41.0 million as at February 28, 2010. Of Dawama’s trade receivables, 35.7% are due from its holding company.

Dawama’s losses have led to an erosion in shareholders’ funds, resulting in a sharp increase in the debt-to-equity ratio (DE) to 46.9 times in FY2009 (FY2008: 3.1 times). MARC believes Dawama is facing an imminent covenant breach at its financial year end of September 30, 2010 and expects the company to seek the indulgence of Sukukholders or negotiate covenant waivers. The negative outlook reflects material risk of a covenant breach notwithstanding MARC’s belief that incoming orders for the 2011 and 2012 school years will provide medium-term earnings and cash flow support for Dawama. The rating could be lowered further if Dawama is unable to address its covenant issues and restore credit protection measures.

Contacts:
Jason Kok 03-2090 2258 / jason@marc.com.my;
Rajan Paramesran, 03-2090 2233 / rajan@marc.com.my