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Press Release
26 Nov | Wednesday
RAM Ratings reaffirms ratings of Poh Kong’s ICP/IMTN

RAM Ratings has reaffirmed the AAA(fg)/Stable/P1 ratings of Poh Kong Holdings Berhad’s (Poh Kong or the Group) RM150 million Danajamin-Guaranteed Islamic Commercial Papers/Islamic Medium-Term Notes Programme (2011/2018) (ICP/IMTN). The enhanced long-term rating reflects an irrevocable and unconditional financial guarantee from Danajamin Nasional Berhad (rated AAA/Stable/P1 by RAM), which enhances the credit profile of the ICP/IMTN beyond the Group’s stand-alone credit strength.

While the financial guarantee also covers the ICP, Poh Kong’s short-term issue rating is equal to that of its guarantor, hence the P1 rating assigned to the ICP. The Group’s P1 issue rating and its stand-alone credit strength are premised on its established reputation and strong market position, moderate balance sheet and adequate debt coverage.

Poh Kong has a more than 3-decade operating history with 106 outlets as at end-July 2014. Its extensive network reinforces its brand (which is synonymous with the jewellery industry in Malaysia) and presence in a competitive and fragmented industry. However, the Group’s financial performance has weakened over the last 2 years, mainly due to declining and volatile gold prices and increased expenses relating to the opening of new stores. Three new outlets opened in 4Q FY Jul 2014 had yet to break even during the review period. That said, Poh Kong’s debt-protection metrics remained intact for FY Jul 2014, with its adjusted funds from operations debt coverage (FFODC) ratio standing at 0.19 times (FY Jul 2013: 0.22 times). Its adjusted gearing rose to 0.73 times as at end-July 2014 (end-July 2013: 0.66 times) as a result of debt-funded inventory purchases for the opening of new outlets. The Group’s liquidity position continues to be supported by its liquid gold inventory.

“Barring any significant movement in gold prices, we expect a recovery in the Group’s earnings, which could also potentially be boosted by GST-induced sales in FY Jul 2015. As such, its adjusted FFODC is anticipated to be at least 0.2 times in the medium term,” said Kevin Lim, RAM’s Head of Consumer and Industrial Ratings. While the Group is expected to continue to expand its retail network, which will entail around RM3 million-RM5 million per outlet, its adjusted gearing ratio is not envisaged to exceed 0.7 times over the next 3 years.

On the whole, Poh Kong’s credit profile is moderated by its vulnerability to volatile gold prices. As observed in FY July 2013, the Group’s earnings are highly sensitive to sharp declines in the price of gold (despite the retail mark-up on yellow gold that has, to some extent, cushioned its profit performance amid volatile gold prices). In addition, Poh Kong requires substantial working capital for its lengthy inventory cycle and to build up the requisite inventory for its large, expanding retail network. Customer sensitivity to movements in gold prices in a competitive and trend-driven industry further moderates the Group’s credit profile.

Media contact:
Robert Ching
(603) 7628 1031
robertching@ram.com.my

source: RAM Rating Services Berhad
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