Wednesday, August 24, 2011

RAM Rating keeps negative outlook on Formis over long-term

KUALA LUMPUR: RAM Rating Services Bhd is maintaining its negative outlook on the long-term rating of FORMIS RESOURCES BHD [] on concerns about its weakened business profile and profit-generating ability.

The rating agency said on Wednesday, Aug 24 although Formis' subsidiary ISS CONSULTING SOLUTIONS BHD [] (ISS) had shown some signs of improvement, the recovery has taken longer than anticipated and its losses were larger than expected.

'Meanwhile, we have a negative view on Formis' recent acquisition of a 20.6%-stake in Ho Hup CONSTRUCTION [] Company Bhd, which is in an unrelated business. The investment may take a toll on the group's already-depressed profit performance, given Ho Hup's years of loss-making position,' it said.

RAM Ratings' head of consumer and industrial ratings Kevin Lim said in addition to Formis' RM16.8 million acquisition cost for a 20.6%-stake in Ho Hup, the group anticipated to invest RM21 million to subscribe for Ho Hup's rights issue.

'The latter is part of Ho Hup's restructuring plan,' he said. 'Given Formis' intention of maintaining a minimum 20% post-dilution equity in Ho Hup, the group's gearing ratio may weaken further if it incurs more debt to increase its stake in Ho Hup,' Lim added.

RAM Ratings had reaffirmed the respective long- and short-term ratings of BBB1 and P2 for Formis Resources' RM80 million murabahah underwritten notes issuance facility/Islamic medium-term notes Facility (2005/2012) (MUNIF/IMTN).'' It had also maintained the negative outlook on the long-term rating.

Formis is involved in a diversified range of information, communication and TECHNOLOGY [] (ICT) products and services while Ho Hup is involved in property development.

The latest financial statistics showed that in the financial year ended March 31, 2011, Formis made an operating loss before interest and tax of RM35.46 million.

The reasons were increased costs following acquisition of ISS, as well as RM33.10 million of goodwill impairment and RM4.60 million of impairment loss on trade receivables.

'Adjusting for the consolidation of ISS and impairment of goodwill, Formis would have performed better with an operating profit of RM14.72 million and a pre-tax profit of RM13.99 million,' it said.

RAM Ratings said despite the operating losses, Formis had a healthy balance sheet and a strong liquidity profile.

Formis group's debt level eased from RM90.06 million as at end-March 2010 to RM76.23 million as at end-March 2011. Correspondingly, its gearing ratio improved to 0.37 times while retaining its net-cash position.

Its liquidity position is supported by its large cash balances of approximately RM80 million as at the same date.

It also expected Formis' gearing ratio to hover around 0.5 times.

RAM Ratings said Formis' ratings continued to be supported by its established reputation after having been in the Malaysian ICT industry for more than two decades, with niches in the government, telecommunications and financial services sectors.

However, the group's ratings were moderated by its inherent need to secure new contracts to replenish its order book and sustain its growth amid the competitive ICT industry.

The ratings could face downward pressure if Formis' business and/or financial profiles deteriorate further, that is the group continues to be in the red.

'On the other hand, the rating outlook may be revised to stable if Formis is able to improve its operating performance by sustaining or augmenting its order book and stemming ISS' losses,' said RAM Ratings.


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