RAM revises outlook on Tan Chong Motor’s ratings to negative

PETALING JAYA: RAM Ratings has revised the outlook on Tan Chong Motor Holdings Bhd's (TCMH) long-term ratings to negative from stable on cashflow and margin pressure concerns.
At the same time, the rating agency reaffirmed the short-term P1 rating of the group's RM1.5 billion CP programme (2014/2021) and the AA2 rating of its RM1.5 billion MTN programme (2014/2034) have been reaffirmed.
In a statement yesterday, RAM also reaffirmed TCMH's corporate credit ratings of AA2 and P1.
"The revision of the outlook is premised on our concern that the group's cashflow-protection measures and margins will remain pressured by intense competition in the automotive industry and the weak ringgit, amidst dampening demand post-implementation of the GST," it said.
In financial year ended Dec 2014, TCMH's funds from operations (FFO) debt cover dropped to 0.16 times from 0.24 times a year earlier, significantly below RAM's expectations.
Meanwhile, TCMH's operating profit before depreciation, interest and tax margin almost halved to 3.9% from 7.5%, following a price war between automotive players and more costly completely-knocked-down (CKD) kits as a result of the depreciating ringgit.
"If these factors persist, we expect a lower FFO debt cover ratio of around 0.10-0.15 times for TCMH in FY Dec 2015," noted RAM's head of Consumer and Industrial Ratings Kevin Lim.
A lower debt level as a result of its securitisation programme and the paring down of inventories had helped TCMH's gearing ratio to ease to 0.51 times as at end-December 2014 from 0.54 times previously.
"As the group targets a lower inventory level, we expect its gearing ratio in the region between 0.50-0.60 times," added Lim.
RAM said the ratings have been reaffirmed, in the meantime, to allow the still-changing industry dynamics and consumer sentiment as well as forex movements in particular the ringgit to stabilise.
It said these inherent factors will continue to dictate the group's operating performance to a certain extent.
RAM said for the first quarter ending Dec 2015, TCMH's facelifted Almera and new-model X-Trail had been well-received.
"This together with the introduction of a new model in second half of 2015, more favourable CKD kit pricing and the management's intention to reduce inventory (mostly debt funded) could set the group on a recovery path. If these positive developments come together, TCMH's FFO debt cover should recover to around 0.20-0.30 times," it said.
RAM said the outlook could revert to stable if TCMH's manages a FFO debt cover of 0.25-0.30 times alongside improved margins, and the maintenance of the group's balance sheet strength.