MARC has affirmed its ratings of MARC-2ID/AID on Symphony House Berhad's (Symphony) RM100.0 million Islamic Commercial Papers/Medium Term Notes (Islamic CP/MTN) Programme with a stable outlook. The rating action affects RM35 million of outstanding Islamic MTNs.

Symphony is a holding company. Through its subsidiaries, the company provides business process outsourcing (BPO) services, cheque processing, corporate secretarial, share registration, accounting, share issuance administration and information technology (IT) services. Its principal subsidiaries include Symphony BPO Solutions Sdn Bhd (SBPO), Symphony Corporatehouse Sdn Bhd (SCH), Symphony Share Registrars Sdn Bhd and Malaysian Issuing House Sdn Bhd, amongst others.

The affirmed ratings are based on Symphony's consolidated business and financial profile. The majority of the group debt is located at the holding company. The affirmed ratings reflect Symphony's established track record in chosen BPO market segments, its satisfactory historical cash flow generation, good liquidity position and low debt burden. At the same time, the rating incorporates the sensitivity of BPO spending and share issuance activity to economic conditions, mounting competition for BPO spending and associated margin pressure, the high level of fixed overheads for its BPO services and the impact of ringgit appreciation on its foreign currency-denominated revenue.

Symphony's 99.9% held BPO subsidiary, SBPO, is an established and leading BPO company in Malaysia and Asia with core offerings in payroll solutions, finance and accounting and call centres. SBPO has a fairly broad geographic footprint in Asia; it services a fairly diverse customer base which includes a meaningful number of global companies and presently generates over 70% of its revenue in foreign currencies.

SBPO's current challenge is to reverse the declining profitability and flat revenues of its core BPO operations amid intensifying competition in its key BPO markets and ongoing cost pressures. SBPO reported 2009 revenues of RM103.7 million and pre-tax profits of RM3.3 million. MARC notes that SBPO's 2009 pre-tax profits were just over half of 2007's RM6.4 million which had been achieved on the back of RM87.5 million revenue.

For the nine months ended September 30, 2010 (9M2010), SPBO incurred a pre-tax loss of RM10.7 million due to foreign currency losses and office relocation-related expenses. On a more positive note, Symphony's 51% owned cheque processing subsidiary has turned around with a modest profit of RM1.7 million for 9M2010 after reporting operating losses in the previous two financial years.

While SPBO generates the bulk of the group's revenues, wholly-owned SCH has contributed 68.5% and 70.1% of consolidated earnings in 2008 and 2009, respectively. SCH reported a pre-tax profit of RM5.7 million for 9M2010 on revenue of RM12.2 million, which was higher than SPBO's 2009 RM3.3 million pre-tax profit. The provider of corporate secretarial, nominee directors, and accounting and payroll services which serves mostly small to midsize domestic businesses continues to generate relatively stable earnings for the group. Symphony's non-core share issuance administration and registration businesses and IT operations continue to be profitable.

Reflecting the weaker performance of its core BPO operations in 9M2010, Symphony reported an operating loss RM2.1 million versus an operating profit of RM11.2 million for 2009. Symphony positive cash flow from operations (CFO) also dropped to RM0.1 million from its historic high of RM41.5 million in 2009. Symphony's cash flow coverage measures remain strong on account of its low debt burden. Its CFO interest coverage had been maintained at 7.0 times and above since 2006, 9M2010 being the exception.

MARC believes that Symphony's consolidated operating cash flow generation will be aided by a pick-up in BPO activity in the near-to-intermediate term as well as satisfactory renewal and account retention rates. The group's liquidity position remains comfortable. As of September 30, 2010, Symphony's designated accounts are funded at RM36.2 million relative to outstanding notes of RM35.0 million under the rated programme.

The stable rating outlook reflects expectations that financial performance will return to levels more in line with the rating category in 2011. The outlook also assumes that any material expansions and acquisitions will be financed in a manner that will limit erosion of its credit metrics.

Contacts:
Ruben Khoo, +6 03-2082 2265 / rubenkhoo@marc.com.my;
Sandeep Bhattacharya, +603-2082 2247 / sandeep@marc.com.my.