Lifeline for Mitsubishi: Nissan Motor Co has agreed to take a 34% stake in Mitsubishi Motors Corp. — Reuters
KUALA LUMPUR: RAM Rating Services Bhd expects Tan Chong Motor Holdings Bhd
’s (TCMH) losses to continue for at least another year due to the difficult operating conditions but a recovery is in sight.
RAM’s head of consumer and industrial ratings Kevin Lim said on Friday he anticipate a recovery from next year and “meaningful improvement envisaged in FY December 2019”.
Lim expected the ringgit to gradually strengthen over the medium term, relieving some cost pressure on TCMH.
“Unit sales will fall significantly this year, before picking up slightly from next year after the launch of new models.
“Meanwhile, the group’s debt load is anticipated to fluctuate along with its working capital needs but remain manageable. Gearing is projected to come in at about 0.6 times as at end-December 2019 and FFO debt coverage to ameliorate to 0.15 times for fiscal 2019,” he added.
RAM Ratings had revised the outlook on TCMH's long-term ratings to negative due to concerns that continued challenging operating conditions could derail the group’s recovery over the next two to three years.
Concurrently, the short-term P1 rating of the group’s RM1.5bil commercial papers programme (2014/2021) and the A1 rating of its RM1.50bil medium term notes (MTN) programme (2014/2034) have been reaffirmed.
The ratings agency also reaffirmed TCMH’s corporate credit ratings of A1 and P1.
RAM Ratings pointed out the automotive sector remains challenged by intense competition amid poor consumer sentiment and tight financing conditions.
It cited that unit sales of Nissan cars in FY December 2016 fell 13.8% while Q1, FY2017 saw sales fall 44.4% following a shift in marketing strategy.
“This, coupled with the weaker-than-expected ringgit that had further elevated TCMH’s cost base, had led to a dismal operating and financial performance,” it said.
The ratings agency also pointed out that in FY 2016 and Q1 FY 2017, TCMH suffered respective pre-tax losses of RM43.08mil and RM35.54mil (FY2015: pre-tax profit of RM115.25mil).
As at end-December 2016, TCMH’s debt level rose to RM1.81bil, with a corresponding gearing ratio of 0.63 times (end-December 2015: RM1.49bil and 0.53 times, respectively), largely drawn to fund hefty working capital requirements as cashflow generation was sluggish.
RAM Ratings pointed out TCMH's liquidity position was also deemed weak, with a substantial RM1.05bil of short-term debt against cash holdings of RM264.20 mil as at end-March 2017.
Meanwhile, TCMH’s FFO debt cover for fiscal 2016 came in at a dismal 0.06 times (FY Dec 2015: 0.15 times).
It cautioned that the ratings could be downgraded if TCMH’s market share does not improve over the next two to three years or the group experience persistent pressure on its margins that weighs on overall performance to a greater-than-anticipated extent.
Margin pressure is likely to arise from a weaker-than-expected ringgit and/or severe competition. An unexpected increase in borrowings which results in gearing of more than 0.8 times or persistently weak liquidity and debt coverage levels could also lead to a downward adjustment of the ratings.
Meanwhile, TCMH’s ratings continue to be driven by its established position in the domestic automotive industry.
In the non-national segment, Nissan has consistently ranked third over the past decade.
“Although the group’s debt level remains elevated, we expect this burden to ease over the next two years.
“These factors are moderated by fierce competition in the automotive industry, the group’s weak cashflow protection metrics, its vulnerability to changes in regulatory policy and economic cycles, and the risk of non-renewal of its distributorship franchises,” said RAM Ratings.
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