MARC has affirmed Boon Koon Group Berhad’s (BKGB) RM100 million Islamic Commercial Papers/Islamic Medium Term Notes (ICP/IMTN) ratings at MARC-3ID/BBB-ID and concurrently revised the outlook to stable from negative. The affirmed ratings reflect BKGB’s improving business risk profile stemming from recent regulatory developments in the rebuilt commercial vehicle industry, as well as business rationalisation initiatives which are supportive of a gradual improvement in the group’s credit profile. The ratings also incorporate its standing as a leading commercial vehicle rebuilder in the domestic market. Upward rating movement is currently constrained by the limited scope for further divestiture of non-core assets to support reduction in its high gearing level and dependence on sustained favourable business and economic conditions to temper refinancing risks in 2012.

BKGB is a family-controlled investment holding company listed on Bursa Malaysia. The group’s principal activities include the manufacturing and distribution of rebuilt and reconditioned commercial vehicles and bodyworks; trading of commercial vehicle accessories, parts and components; and resale of value-added chassis cabs and equipment. The group is a pioneer and market leader in the domestic rebuilt commercial vehicles industry. The head office and principal manufacturing plant are located in Nibong Tebal, Penang.

The group’s financial metrics was impacted by the authorities clampdown on the abuse of rebuilt commercial vehicle registrations in the second half of 2008. The group incurred pre-tax losses of RM60.97 million for the 15-month financial period ended March 31, 2009 (FY2009) due to the freeze in the registration of rebuilt commercial vehicles. The clampdown was lifted in early 2009 with the implementation of a new restricted AP system which allocates sales quotas to commercial vehicle rebuilders. A consequence of the new regulatory regime has been consolidation in the industry and fewer players. MARC believes that the changes in the structure of the industry and competitive dynamics will benefit BKGB’s business risk profile.

The group staged a turnaround on restructuring efforts in the financial year ended March 31, 2010 (FY2010) with a pre-tax profit of RM0.1 million on revenues of RM154.0 million (FY2009: RM188.2 million). Cash flow from operations increased to RM41.5 million (FY2009: RM3.0 million) on the reduction of its cash conversion cycle to 302 days (FY2009: 365 days). The free cash flow generated from reduced working capital needs and disposal of non-core assets has been used to pare down debts, bringing BKGB’s debt-to-equity (D/E) ratio to 2.83 times (x) (FY2009: 3.08x). For the 3-month period ended June 30, 2010 (1QFY2011), the group recorded pre-tax profit of RM0.58 million (1QFY2010: pre-tax loss of RM0.93 million) on the back of 84.8% increase in revenue to RM42.7 million. Although debt repayments are helping to reduce BKGB’s leverage, the group’s D/E ratio remains elevated at 2.64x. The group needs to demonstrate sustainable revenue growth and margin improvements to generate sufficient cash flow to continue to repay bank debt and bring down its gearing to the covenant level of 1.50x. MARC believes that BKGB’s ability to realise improvements in its financial performance and financial metrics will depend on the demand from key customer segments which include the road haulage, building and construction and manufacturing sectors.

As at June 30, 2010, BKGB’s liquidity appears adequate with unencumbered cash and bank balances of RM31.9 million and availability of RM10.9 million under its credit facilities against short-term borrowings of RM93.1 million. MARC notes that BKGB’s noteholders have been accommodating, and have agreed to a covenant amendment and maturity extension. As at September 27, 2010, the aggregate principal amount of outstanding notes was RM45.0 million of which RM10.0 million and RM35.0 million are due in February and December 2012 respectively. MARC believes that the maturity extension allows time for the group’s financial profile to improve as broader economic recovery continues which in turn would help to lower refinancing risks in 2012. 

Contacts:
Sabesh Parameswaran, 03-2082 2260/sabesh@marc.com.my;
Mac Lai Yew Weng, 03-2082 2280/lyweng@marc.com.my;
Francis Xaviour Joe, 03-2082 2279/ fxjoe@marc.com.my.