RAM Ratings reaffirms Poh Kong’s ratings

KUCHING: RAM Ratings has reaffirmed the AAA(fg)/Stable/ P1 ratings of Poh Kong Holdings Bhd’s (Poh Kong) RM150 million Danajamin- Guaranteed ICP/ IMTN Programme (2011/2018).

The enhanced long- term rating reflects an irrevocable and unconditional financial guarantee from Danajamin Nasional Bhd, rated AAA/ Stable/ P1 by RAM, which enhances the credit profile of the ICP/IMTN beyond the Group’s stand-alone credit strength.

The P1 rating, which mirrors Poh Kong’s stand-alone credit profile, has been reaffirmed notwithstanding the financial guarantee on the ICP.

“Poh Kong’s stand-alone credit strength lies in its established reputation and strong market position as the largest jewellery retail chain in Malaysia, backed by a 4-decade operating history,” it said in a statement.

The group also possesses a healthy balance sheet, with a relatively unchanged debt level of RM228.57 million as at endJuly 2016, translating into an adjusted gearing ratio of 0.55 times.

“Furthermore, Poh Kong’s liquidity is supported by its liquid and valuable gold inventory. Over the next two years, we envisage the group’s balance sheet and liquidity position remaining favourable.”

The ratings agency said Poh Kong’s sales in the financial year ending July 2016 were affected by reduced demand amid poorer consumer sentiment, leading to a 14 per cent reduction in samestore sales and a substantial 33 per cent drop in pre-tax profit.

This resulted in the group’s adjusted funds from operations (FFO) debt coverage for fiscal 2016 coming in slightly below 0.20 times, although still adequate.

“We anticipate another challenging year ahead, with consumer sentiment weighed down by the rising cost of living, a weaker ringgit and an uncertain economic outlook.

“Nonetheless, we expect Poh Kong’s adjusted FFO debt coverage to stay adequate over the next two years, ranging between 0.20 and 0.23 times, barring any substantial and sudden fluctuations in gold prices.”

Poh Kong’s credit profile is moderated by its vulnerability to volatile gold prices and forex rates. Besides the inherent volatility of gold prices, the steady depreciation of the ringgit against the US dollar over the past two years has impacted the group’s input prices.

Given that input cost lags movements in retail prices, Poh Kong remains susceptible to sharp declines in the price of gold in ringgit. However, the retail mark- up on yellow gold provides a buffer against goldprice volatility.

“Elsewhere, Poh Kong’s credit profile is further moderated by hefty working- capital requirements, attributable to its long inventory cycle and the buildup of requisite inventory for the group’s wide retail network.

“Customer sensitivity to movements in gold prices within a competitive and trend-driven industry is another key factor that can affect the ratings.”