MARC has affirmed its rating on Talam Transform Berhad’s (Talam) outstanding RM53.1 million Settlement Bithaman Ajil Debt Securities (Settlement BaIDs) at B-_ID with a stable outlook. The rating incorporates Talam’s weak financial position and limited business prospects, as well as its continued reliance on timely asset disposals to meet substantial financial obligations.

Talam’s borrowings and trade and other payables remained elevated at RM189.1 million and RM636.2 million (including tax liabilities) respectively as at end-April 2015, although these have continued to decline as the group utilised proceeds from land disposals to reduce its financial obligations. For the financial year ending January 31, 2015 (FY2015), Talam recorded RM143.8 million in land sales and expects to receive proceeds of RM96.5 million in FY2016. As at end-April 2015, Talam’s land bank size of 1,332.1 acres, which the group has valued at about RM1.0 billion for the unencumbered portion, continues to provide a source of income from disposals. Nonetheless, MARC is of the view that Talam could face challenges in this regard given the less than prime locations of the bulk of its land bank. In addition, the prevailing slowdown in the property sector would weigh on land sales over the intermediate term.

The rating agency notes that Talam has yet to embark on any projects on its own since the last review and is awaiting approval on its development plans. Any approval delays could be partly attributed to lingering concerns over Talam’s property development track record. To shore up interest in its developments, Talam has indicated that it would partly adopt the build-and-sell concept in areas where infrastructure has been substantially developed. MARC remains circumspect on the group’s ability to undertake project funding given its stretched balance sheet. Due to its weak business prospects, the rating agency does not expect any meaningful recovery in profitability over the intermediate term.

For FY2015, Talam suffered a pre-tax loss of RM97.9 million (FY2014: pre-tax profit of RM23.2 million) largely due to impairment losses of RM159.5 million, of which RM101.1 million was impairment on land held for property development. Cash flow from operations (CFO) was higher at RM158.7 million (FY2014: RM20.1 million), due mainly to a decline in assets held for sale by RM235.5 million. However, the improved CFO was offset by a RM145.8 million net increase in joint ventures. The net increase mainly arose from termination agreements with joint-venture partner IJM Properties Sdn Bhd.

For 1QFY2016, Talam recorded a lower pre-tax loss of RM2.5 million (1QFY2015: pre-tax loss of RM16.5 million). The lower pre-tax loss was attributable to higher revenue and profit margins from land sales and other income but was dragged by a provision for loss on disposal of development properties totalling RM74.0 million. As a result of the lower pre-tax losses, CFO in 1QFY2016 was higher at RM55.1 million (1QFY2015: deficit of RM41.8 million). The group’s liquidity position remained weak with cash and bank balances of RM30.5 million as at end-April 2015 (end-FY2015: RM29.6 million). Nonetheless, the group will have sufficient cash to meet its next profit payment of RM1.6 million due on December 29, 2015. The rating agency observes that the group has continued to make early partial redemptions on the rated issue, with a redemption of RM34.3 million made on June 22, 2015. The unsecured balance on the Settlement BaIDs amounting to RM33.0 million (after deducting the value of security estimated by Talam) is expected to be met with proceeds from asset disposals by its maturity in 2019.

Downward rating pressure would occur if Talam’s liquidity position deteriorates sharply and/or if it faces challenges to realise its asset disposal programme. Any improvement in the rating would depend on the group’s ability to achieve a sustainable turnaround in its financial performance.

Contact:
Ngiam Tee Wei, +603-2082 2268/ teewei@marc.com.my;
Yap Lai Ken, +603-2082 2247/ laiken@marc.com.my.