Thursday, July 7, 2011

RAM reaffirms ratings of CCM RM500m debt notes

KUALA LUMPUR: RAM Rating Services Bhd reaffirmed the respective long- and short-term ratings of CHEMICAL COMPANY OF MALAYSIA [] Bhd's RM500 million Islamic debt notes at AA3 and P1.

The rating agency said on Thursday, July 7 the debt notes were the Musharakah commercial papers/medium-term notes programme (2008/2023).

'Concurrently, the negative outlook on the long-term rating has been maintained,' it said, adding that CCM's patchy recovery since the 2008/2009 global financial crisis.

CCM's subsidiaries are involved in the manufacture and distribution of pharmaceutical products, fertilisers, industrial chemicals and polymer-coating solutions as well as designing, installing and providing maintenance services for water and wastewater-treatment systems.

RAM Ratings said the reaffirmation of the ratings was due to CCM's strong market position in its core businesses and its well-diversified business profile.

To recap, CCM is one of Malaysia's largest manufacturers of pharmaceuticals and compound fertilisers; it is one of only two companies in the country that supplies liquefied chlorine to water-treatment plants.

It added that CCM is also the largest local producer of polymer-coating solutions for rubber gloves. Its diversified business profile enables it to better withstand a downturn in any particular sector.

'CCM derives financial flexibility from its major shareholder, Permodalan Nasional Bhd (PNB); PNB's active participation in the strategic direction of the Group underlines CCM's importance to its parent,' it said.

However, it said CCM's chemicals division remains exposed to the cyclical nature of manufacturing demand while the performance of its fertilisers division largely depends on the fortunes of the oil palml industry, which is also highly cyclical.

RAM Ratings said cautioned that due to the competitive landscape of its core businesses and the relatively generic nature of its products (pharmaceuticals, fertilisers and chemicals), CCM is exposed to pricing risk. CCM is vulnerable to the price volatility of raw materials, which constitute a large proportion of the various divisions' costs.

'Meanwhile, our reiteration of the negative rating outlook is premised on CCM's patchy recovery since the 2008/2009 global financial crisis. Although the Group's overall performance improved in fiscal 2010, its recovery remained slow, largely due to the more intense competition faced by its fertilisers and pharmaceuticals divisions.

'As such, its funds from operations debt cover (FFODC) of 0.14 times as at end-December 2010 remained below our initial projection of 0.2 times (end-December 2009: 0.08 times). As at end-March 2011, CCM's annualised FFODC stayed unchanged at 0.14 times,' it said.

RAM Ratings' Head of Consumer & Industrial Ratings Kevin Lim said looking ahead, the fertilisers division may keep being plagued by price competition amid an oversupply of local fertilisers.

'This, coupled with the anticipated commencement of commercial production for its new fertiliser plant in Lahad Datu, Sabah (in July 2011), heightens the group's exposure to demand risk.

'In addition, the division may still have to contend with escalating raw-material costs. Meanwhile, the pharmaceuticals division's profit margins, which have been thinning over the years, remain vulnerable to competitive pressures. The Group's water-system business is still mired in losses due to insufficient contracts amid lacklustre investment growth for the industrial sector,' he added.

Lim said should CCM's financial profile deteriorate, there may be downward pressure on its ratings. On the other hand, the rating outlook may be revised to stable if the group is able to show sustainable improvement in its debt-coverage ratios and capital structure.

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