RAM Ratings lowers Naim Holdings’ RM500m debt notes to negative

KUALA LUMPUR: RAM Rating Services Bhd has lowered the long-term rating of Naim Holdings Bhd's RM500mil Islamic medium-term notes programme (2010/2025) (IMTN) from stable to negative due to the weakened financial profile.

The ratings agency said on Friday the respective long- and short-term ratings of AA3 and P1 for the IMTN and RM100mil Islamic commercial papers programme (2010/2017) remained unchanged.

“The revised outlook is premised on Naim's weakened financial profile as a result of the slow progress of its contracts in hand, absence of notable new contracts, deferred property launches and delayed project implementation,” it said.

The Sarawak-based Naim's core activities are property development and construction. It also owns 34% of oil and gas support services provider Dayang Enterprise Holdings Bhd.

On the outlook, RAM Ratings said Naim's credit profile was likely to be constrained by its slower construction division and plans for hefty debt-funded capital expenditure.

“The Group is also facing keener competition within the construction sector, resulting in thinner margins. While we believe Naim still stands a good chance of clinching new jobs under various economic initiatives, including the Sarawak Corridor of Renewable Energy, the timing of their implementation is uncertain,” it said.

Naim's weak showing since 1Q FY December 2011 resulted in a 33.1% on-year plunge in its topline to RM409.65mil for the full year (FY December 2010: RM612.69 million); its construction division suffered operating losses since 3Q.

RAM Ratings noted this deviated substantially from its initial expectations. Naim's construction division had realised lower contract billings following delays caused by land issues, bleak weather and design changes. The division also did not manage to secure any notable new contracts last year.

It also said Naim's property division's progress billings had declined due to delayed launches of new projects.

Naim's dwindling topline and fixed overheads as well as heftier interest costs led to an operating loss before tax of RM4.31 million in fiscal 2011 (FY Dec 2010: RM96.89 million profit).

“Naim could deliver a better showing this year if its projects progress as scheduled. This is based on the management's timeline for its RM685.4 million order book (as at end-December 2011), higher unbilled sales from properties launched in 2H 2011 and the accelerated development of its property projects.

RAM Ratings said even based on this pipeline, it was likely to come below its earlier projections.

However, Naim's financials recovery hinged on its ability to replenish its order book. Although the group seeks to secure about 8% of the RM6 billion of projects tendered, the ratings agency said the uncertain timing of contract awards and/or implementation may dampen its replenishment efforts.

Moving forward, Naim plans to incur hefty debt-funded capital expenditure to acquire land and investment properties; its gearing ratio could exceed 0.6 times while its operating profit before depreciation, interest and tax debt coverage may sink below 0.15 times over the next 3 years. These ratios are weak for the rating.

As at end-December 2011, Naim's debt load had swelled to RM347 million (end-December 2010: RM125.11 million), with corresponding gearing and net gearings of 0.45 and 0.17 times, respectively (end-December 2010: 0.17 and 0.12 times).

RAM Ratings said Naim's ratings may face downward pressure if its recovery was slower than anticipated and/or its financial metrics weaken beyond the acceptable level for the ratings.

Alternatively, the rating outlook may be reverted to stable if the group was able to replenish its order book, sustain the uptrend in its unbilled sales and demonstrate robust improvement in its business and financial profiles.