Credit Rating

Rating Announcement

RAM reaffirms P2 rating of
Integrated Logistics’ CPs
Friday, 07th July 2006

RAM has reaffirmed the short-term rating of Integrated Logistics Berhad’s (“ILB” or “the Group”) RM60 million Commercial Papers (“CPs”) at P2. Meanwhile, ILB’s corporate credit rating has also been reaffirmed at A3. The ratings reflect ILB’s status as one of Malaysia’s more established providers of integrated logistical solutions, with the experience and capability in offering a full range of services – from forwarding and transportation to warehousing services and supply-chain management.

The ratings are also supported by the Group’s growing operations in China.  For FYE 31 December 2005 (“FY Dec 2005”), contributions from China accounted for a respective 39% and 65% of the Group’s turnover and pre-tax profit. Meanwhile, ILB’s position in China had also strengthened following the completion of its Shenzhen III and Shanghai II warehouses in April 2005, which almost doubled the Group’s net lettable space in that country. For the year under review, ILB achieved commendable occupancy rates for its warehouses and managed to secure IBM as the main client for the vendor-managed inventory (“VMI”) operations at its Shenzhen III warehouse. RAM opines that ILB’s good track record in China since the mid-1990s will provide further growth opportunities for the Group going forward. 

Supported by the stable income from its warehousing operations, the Group achieved a 7% year-on-year turnover growth to RM190.50 million for FY Dec 2005. Meanwhile, the several rounds of fuel-price hikes in FY Dec 2005 had exerted a relatively minimal impact on ILB as trucking and haulage services only serve as complements to the Group’s core warehousing business. In line with ILB’s emphasis on providing more value-added services such as supply-chain solutions in both Malaysia and China, the Group maintained its commendable margin on operating profit before depreciation, interest and tax (“OPBDIT”) at above 30% in FY Dec 2005.

The ratings are, however, moderated by stiff competition and the fragmented nature of the logistics industry, both in Malaysia and China. With the further deregulation of China’s logistics sector in FY Dec 2006, competition is expected to heighten as more new players are envisaged to enter the industry. Meanwhile, with its major clients stemming mostly from the electronics and electrical sector, ILB’s performance is exposed to the fluctuations of this sector. Besides, ILB is also reliant on its 2 main clients, i.e. Lenovo and IBM, for its VMI operations, which currently contribute 94% of the Group’s turnover from its China operations.

Going forward, the Group plans to expand its warehousing operations to other parts of China as well as to venture into the forwarding and transportation businesses. These expansions plans are expected to be largely debt-funded, unless ILB’s plan to list its Chinese operations on the Hong Kong Stock Exchange materialises in the intermediate future.

As at end-FY Dec 2005, ILB’s debts amounted to RM210.90 million, which was within RAM’s expectations. Supported by its sturdy shareholders’ funds, the Group’s net gearing ratio was relatively unchanged at 0.51 times vis-à-vis a year earlier. At the same time, the Group’s debt-servicing ability remained adequate with an operating cashflow debt coverage of 0.24 times. Looking ahead, the Group’s debt level is anticipated to gradually increase over the next few years, to fund its expansion activities in China. Nonetheless, RAM expects ILB’s gearing ratio to remain manageable at around 0.65 – 0.80 times throughout the tenure of the CPs. In the meantime, the Group’s operating cashflow debt cover is also envisaged to remain adequate at about 0.17 - 0.22 times.

Analyst:
Michelle Leong
Tel: (603) 7628 1715
michelle@ram.com.my