MARC has affirmed its AAA(bg) and AAA(fg) ratings on investment holding company Premier Merchandise Sdn Bhd’s (Premier Merchandise) RM300 million seven-year bank-guaranteed Medium Term Notes (MTN) Programme (Tranche 1) and RM300 million nine-year Danajamin-guaranteed MTN Programme (Tranche 2) respectively. The outlook for both ratings is maintained at stable.

The rating assigned on Tranche 1 is underpinned by an unconditional and irrevocable guarantee provided by Malayan Banking Berhad (Maybank). MARC currently rates Maybank at AAA/stable. The rating on Tranche 2 reflects the credit strength of an unconditional and irrevocable Kafalah Guarantee provided by Danajamin Nasional Berhad (Danajamin). MARC maintains an insurer financial strength rating of AAA/stable on Danajamin.

Premier Merchandise’s standalone credit strength is largely dependent on the financial performance of its wholly-owned subsidiary Berjaya Retail Berhad (BRetail). In turn, BRetail is mainly reliant on the earnings of its wholly-owned subsidiaries, namely 7-Eleven Malaysia Sdn Bhd (7-Eleven) and Singer (Malaysia) Sdn Bhd (Singer), both of which have fairly entrenched market positions. MARC considers their longstanding operating track records and strong footholds in the domestic retailing industry as franchise operators as key competitive strengths. 7-Eleven is the single largest convenience store operator in Malaysia with 1,497 stores while Singer is a major player in direct selling of consumer durables through its 715 branches and 3,500 independent sales agents. Singer is also involved in motorcycle hire purchase.

MARC notes the profitability uptrend of both companies in recent years; however, profit margins have remained low, reflecting the keen competition in the industry. 7-Eleven and Singer registered year-on-year operating profit growth of 33.7% and 7.4% to RM66.13 million and RM57.9 million respectively for financial year ended December 31, 2012 (FY2012).

MARC understands BRetail will continue to undertake branch/store expansion of its subsidiaries, in particular 7-Eleven which has earmarked an additional 150 stores to be opened in the near term. Proceeds from the drawdown under the rated MTN Program had been partly onlent to BRetail to largely refinance its existing loan and to meet the capital expenditure for expansion. BRetail is also seeking to strengthen its consumer electronics retailing under the US-based Radioshack brand from its present six branches in the Klang Valley. Accordingly, the rating agency views the ability of the subsidiaries to upstream dividends or extend financial support to the holding company could be hampered by their need to meet their own obligations.

For FY2012, BRetail’s consolidated revenue improved by 8.6% to RM2.0 billion (FY2011: RM1.9 billion), of which 77.3%, or RM1.6 billion, was contributed by 7-Eleven Malaysia and 22.1%, or RM450.6 million, was contributed by Singer. BRetail’s pre-tax profit increased twofold to RM316.3 million in FY2012 due largely to a one-off gain of RM227.1 million from the disposal of its interest in Hong Kong-based Cosway Corporation Limited following a privatisation exercise. Excluding the one-off gain, BRetail’s pre-tax profit would register a growth of 31.5% to RM89.2 million (FY2011:RM67.9 million). The strong performance has enabled BRetail to declare dividends of RM261.8 million to Premier Merchandise, resulting in a substantial increase in its revenue to RM264.7 million (FY2011: RM3.2 million) and net profit to RM222.2 million in FY2012 (FY2011: negative RM24.5 million). Nonetheless, as Premier Merchandise declared dividend amounting to RM280.3 million for the year, cash retention at the holding company is minimal at RM0.2 million (FY2011: RM1.0 million).  

MARC notes that Premier Merchandise had fully drawn down RM600 million MTNs in January 2013, which was partly used to retire outstanding borrowings of RM376.4 million. The net DE ratio post drawdown has increased to 1.20 times, with principal payments totalling RM300 million under the first tranche of the programme due in January 2015. MARC notes that of this amount RM40 million would need to be redeemed in line with the programme’s reduction schedule. The group could utilise bank borrowings and/or use part proceeds from the impending listing of 7-Eleven Malaysia on Bursa Malaysia to address its obligations under the MTN programme. 7-Eleven Malaysia’s proposed public listing exercise is expected to raise approximately RM700.0 million.

Noteholders are, however, insulated from the downside risk related to the credit profile of Premier Merchandise by the guarantees provided by Maybank and Danajamin. Any change in the supported ratings or rating outlook would be primarily driven by changes in the credit strength of the guarantors.
 
Contacts:
Jasmine Kua, +603-2082 2280/ jasmine@marc.com.my; 
Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my.