RAM Ratings reaffirms AAA(fg) rating of Mydin’s Sukuk
Excluding the financial guarantee, Mydin Holdings’ stand-alone credit profile reflects its weak financial profile and the loss-making positions of its KR1M, SAM’sGroceria and mall segments. The Group is also exposed to execution and construction risks in relation to its aggressive expansion, and the competitive environment of the local mass grocery retail sector.
On the other hand, Mydin Holdings credit profile is supported by its position as one of the largest locally owned grocery retailers, and as the only prominent player across all retail formats (i.e. hypermarket, emporium, mini-market). The Group has built an extensive presence, mainly in Peninsular Malaysia, with 272 outlets as at end-October 2015. The Group has also established a strong following among its targeted low-to-middle-income customers and carved a niche among Muslim consumers, by offering fully halal products and an array of goods manufactured by local players not typically carried by its foreign-owned competitors.
Notably, Mydin Holdings’ pre-tax profit doubled to MYR 29.37 million for FY Mar 2015 after a weak showing in the previous year (FY Mar 2014: MYR 14.40 million), driven by the better showing of its emporiums, mini markets and KR1M. The improvement of its mini-market and emporium segments were due the closure of unprofitable outlets, reduction in operating expenses following cost cutting efforts as well as better stock replenishment after rectifying its logistics and warehousing issues. Meanwhile, losses from KR1M narrowed, supported by subsidies. However, we note that the Group’s new mall and its venture into the premium-retail segment (via SAM’s Groceria) recorded increased losses in FY Mar 2015 amid poor performance of its new outlets.
In line with its expansion plans, Mydin Holdings’ borrowings had increased year-on-year from MYR 566.97 million to MYR 729.15 million as at end-FY Mar 2015. Correspondingly, its gearing ratio weakened to 1.47 times from 1.16 times. Including its operating lease commitments, Mydin Holdings’ adjusted gearing ratio stood at 2.60 times as at end-March 2015.
Looking ahead, Mydin Holdings remained focus on expanding in the hypermarket segment. “Factoring the required borrowings to fund its expansion, Mydin Holdings’ adjusted gearing is expected to stay elevated at about 2.5-2.8 times over the next few years,” says Kevin Lim, RAM’s Head of Consumer and Industrial Ratings. We remain concerned on the associated long gestation period for its new hypermarkets and the potential negative impact on its financial profile. “Mydin Holdings’ funds from operations debt cover is envisaged to stay depressed at around 0.1 times due to additional debt to fund expansion,” adds Lim.