MARC has assigned preliminary ratings to Premier Merchandise Sdn Bhd’s (PMSB) issuance of up to RM300 million 7-year Medium-Term Notes (MTN) (Tranche 1) of AAA(bg) and RM300 million 10-year MTN (Tranche 2) of AAA(fg). The outlook for both ratings is stable. The assigned ratings reflect the credit strength of the unconditional and irrevocable guarantees provided by Malayan Banking Berhad (Maybank) for Tranche 1 and financial insurer Danajamin Nasional Berhad for Tranche 2. MARC currently rates these institutions at AAA/Stable.

Part of the proceeds from the MTN issuance will be used to refinance PMSB’s term loan of RM380 million. The balance will be onlent to its wholly-owned subsidiary, Berjaya Retail Berhad (BRetail) to refinance its term loan of RM175 million and the remainder to fund the capital expenditure of 7-Eleven Malaysia Sdn Bhd (7-Eleven Malaysia). PMSB is an investment holding company whose two key indirect wholly-owned subsidiaries, which are held through BRetail, are involved in consumer retailing.  7-Eleven Malaysia is the franchise operator of “7-Eleven” outlets in the country while Singer (Malaysia) Sdn Bhd (Singer) is involved in direct selling of mainly “Singer” branded consumer durables.

MARC notes that both 7-Eleven Malaysia and Singer have long operational track records which have enabled them to establish strong brand recognition and competitive foothold in the domestic retailing industry. 7-Eleven Malaysia is the leading convenience store operator in the country with 1,396 outlets nationwide. Operating under a franchise licence from US-based 7-Eleven Inc, 7-Eleven Malaysia’s licensing risk is largely mitigated during the tenure of the MTN programme given that the licence expires only in 2033. 7-Eleven Malaysia plans to expand rapidly in the medium term to strengthen its dominant position in the convenience store segment; however, MARC views that any debt-funded capital expenditure could strain the company’s balance sheet and limit its ability to upstream dividends or extend other financial support to the holding company.     

PMSB’s other major sub-subsidiary, Singer, undertakes sales of mainly consumer electronics through a large sales network at its 736 branches which are mainly located in small towns and rural areas. Singer’s sales and marketing strategy are focused on the low-to-medium income segments. The company is also involved in the hire purchase of motorcycles which comprises 40% of overall sales. While consumer retailing is characterised by low margins, Singer’s net operating margins have been strong, averaging 12.5% over the last five years, due mainly to income earned from credit financing extended to its customers. Nonetheless, MARC notes that Singer’s hire purchase and instalment payment portfolio would continue to expose the company to bad debts. As of FY2011, the impairment loss arising from Singer’s hire purchase and equal payment receivables stood at approximately RM21.0 million.

As an investment holding company, PMSB‘s revenue is mainly derived from dividend income from its key subsidiary, BRetail,  whose performance is dependent on 7-Eleven Malaysia and Singer’s ability to upstream dividends. Although both 7-Eleven Malaysia and Singer continue to register steady financial performance, no dividends have been upstreamed in recent years due mainly to meet their own financial obligations and to fund their expansion programmes. BRetail’s revenue of RM1.88 billion (FY2010: RM1.72 billion) was mainly contributed by 7-Eleven Malaysia (77.8%) and Singer (22.0%) for financial year ended December 31, 2011 (FY2011). Nonetheless, BRetail’s pre-tax profit declined marginally to RM67.90 million (FY2010: RM69.8 million) due to higher financing charges.

As at December 31, 2011 (FY2011), PMSB’s revenue declined by 63% to RM3.2 million (FY2010: RM8.7 million) and registered a pre-tax loss of RM24.5 million in FY2011 (FY2010:  pre-tax profit of RM511.2 million) on higher financing costs as a result of borrowings of RM373.7 million (FY2010: Nil) to part-finance the recent privatisation of BRetail. The borrowings will be refinanced by the proceeds from the MTN issuance.  MARC notes that based on cash flow projections, no meaningful dividends are expected to be received by PMSB during the tenure of the MTN programme to support principal and interest payments. As such, PMSB is reliant on intercompany loans from holding and subsidiaries and/or external sources to meet its obligations under the programme.

These factors notwithstanding, the bank-guaranteed MTN noteholders and the Danajamin-guaranteed MTN noteholders are insulated from downside risks related to PMSB’s credit profile by virtue of the guarantees provided by Maybank and Danajamin respectively.

Contacts:
Jasmine Kua, +603-2082 2280/ jasmine@marc.com.my
Tan Eng Keat, +603-2082 8865/ engkeat@marc.com.my
Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my