RAM Ratings cautious on Formis purchase of Ho Hup stake

KUALA LUMPUR: RAM Rating Services Bhd is cautious over Formis Holdings Bhd’s recent acquisition of a 20.59% stake in Ho Hup CONSTRUCTION [] Company Bhd – the latter which is technically insolvent and classified under Practice Note 17.

The ratings agency said on Tuesday, July 5 that Formis’ RM80 million Murabahah underwritten notes issuance facility/Islamic medium-term notes facility (2005/2012) (MUNIF/IMTN) are rated BBB1/negative/P2.

RAM Ratings said Formis’ plan to diversify into construction and property development to improve its earnings could have a negative impact on Formis’ immediate financial performance.

“In addition, we view the foray into an unrelated business negatively,” it said.

Formis’ core activities are information, communication and TECHNOLOGY [] products and services while Ho Hup’s is involved in construction, property development and ready-mixed concrete.

“While we acknowledge that there may be medium- to long-term development potential for Ho Hup’s land bank in Bukit Jalil, Selangor, we are circumspect about the negative impact the investment could have on Formis’ immediate financial performance,” it said.

RAM Ratings also highlighted Ho Hup is technically insolvent and has been classified under PN17 by Bursa Malaysia since July 2008; it posted pre-tax loss of RM16.09 million in FY ended Dec 31, 2010.

“Without a near-term turnaround for Ho Hup’s business, Formis is likely to shoulder its share of the former’s losses in its FYE March 31, 2012 results.

“This would in turn take a toll on the group’s already-depressed profit performance. Nevertheless, the cash acquisition (funded by debt) is not anticipated to have a material strain on Formis’ balance sheet given the latter’s cash pile of over RM80.75 million as at March 31, 2011,” it said.

The ratings agency said it had in March 2011 revised the outlook on Formis’ long-term rating from stable to negative in March 2011.

Its concerns were over the group’s persistently weak financial performance in recent quarters - a result of the longer- and larger-than-anticipated losses of ISS CONSULTING SOLUTIONS BHD [].

In FY ended March 2011, Formis posted operating loss of RM35.50 million, mainly due to costs related to ISS’s reverse take-over, that is RM36.30 million of administration, professional and consultant fees, plus RM33 million of goodwill impairment and RM4.6 million of impairment loss on trade receivables.