MARC has affirmed its rating of MARC-2ID for Prinsiptek Corporation Berhad’s (Prinsiptek) Murabahah Commercial Paper (MCP) Programme of up to RM30 million and revised the outlook to stable from negative. The rating action follows MARC’s review of Prinsiptek’s credit profile after the construction group’s announcement of its first half FY2010 profit of RM2.8 million compared to a reported full year pre-tax loss of RM8.4 million in FY2009. The rating action incorporates Prinsiptek’s improved liquidity and increased cash flow from operations mostly stemming from working capital and debt reduction. Nonetheless, the construction group’s credit metrics remain weak for the current rating and any slippage in expected credit measures and less favourable than expected order book replenishment are likely to exert downward pressure on the rating.

The group’s unbilled construction order book stands at around RM209 million as at end-March 2010, of which about 67% is accounted for by government-related contracts. MARC believes that with 78% of Prinsiptek’s orders scheduled to complete by end-2010, the extent to which Prinsiptek’s order book is replenished with new projects over the next several quarters will be key to providing revenue and earnings certainty beyond FY2010.

The uptick in the group’s property development activity provides some comfort against the backdrop of limited medium-term construction revenue and earnings visibility. The group expects to launch three property development projects with a total gross development value (GDV) of RM224 million. Among the three projects, MARC expects the Vue Residence project, comprising 272 units of high-end serviced apartments and retail properties in Jalan Pahang, Kuala Lumpur with a GDV of RM133 million, to provide support to Prinsiptek’s earnings on account of its good location. The performance of Prinsiptek’s property development operations depends in part on the extent of competition from similar projects in the Klang Valley and buoyant demand from house buyers.

Prinsiptek’s revenue increased to RM181.96 million in FY2009 from RM119.62 million in FY2008 although revenue and earnings have yet to recover to FY2007 levels. Despite higher revenue, the group registered a pre-tax loss of RM8.4 million in FY2009 (FY2008: RM4.63 million), mainly attributable to a write-off capitalised cost of RM8.35 million on a housing project  with the National Housing Authority of Thailand. Other non-cash charges during FY2009 include a RM5.0 million impairment losses from its holding of defaulted subordinated bonds.

Prinsiptek continues to generate positive net cash flow from operations in FY2009 of RM45.23 million, a 59% increase from RM28.47 million in the previous year mainly due to working capital reduction, in particular improved collection of its trade receivables during the year. For the six months ended June 30, 2010 (1HFY2010), revenue increased by 13.6% to RM83.0 million from RM73.0 million in 1HFY2009 underpinned by higher contribution from its construction division. However, its pre-tax profit fell to RM2.78 million (1HFY2009: RM3.1 million) attributed to higher contribution by lower margin projects during the period.

The group’s leverage has improved as a result of a RM54.2 million repayment of borrowings in FY2009 and more recently, due to after-tax profit retention in 1HFY2010. MARC expects the group’s gearing levels to improve further from 0.63 times as at end-June 2010 with the scheduled redemption of RM6 million MCP in December 2010. Prinsiptek expects to fund the partial redemption of the commercial paper from the sale proceeds of residential properties and land identified for disposal.

Contacts:
Janey Chock, 03-2090 2264/ janey@marc.com.my/;
Rajan Paramesran, 03-2090 2233/ rajan@marc.com.my