S&P: Rising debt can erode credit profile of Malaysian companies

S&P: Rising debt can erode credit profile of Malaysian companies

KUALA LUMPUR: Revenue growth that does not catch up with increasing capital expenditure (capex) and dividend payouts, could dent Malaysian companies’ credit profiles, says Standard & Poor’s Ratings Services’ (S&P).

In the Asean Top Companies report, published based on the top 100 companies in South-East Asia that includes 24 Malaysian companies, S&P expected the aggregate debt of local firms to increase over the next one year.

Speaking to reporters over a luncheon, credit analyst Xavier Jean said the aggregate net debt of the Malaysian companies surveyed grew at an estimated 50% between 2008 and the first quarter of 2014.

“Capital spending increased 40% in the period, while dividends rose by close to 60%. In comparison, median revenue growth halved in 2013 to about 4%, compared with 10% in 2012, 2011 and 2010.”

Due to the higher debt level, the median ratio of net debt to earnings before interest, taxes, depreciation and amortisation (EBITDA) grew to about 2 times at end-2013 compared with 1.2 times at end-2008.

The rating agency’s Asia Pacific corporate ratings analytical manager managing director Michael Seewald said higher debt level might have increased the companies’ credit risk but it kept the companies growing.

“The organic growth scenario seems to have hit the ceiling and some companies are leveraging on the favourable credit environment to expand via acquisitions,” he added.

From a risk perspective, he noted that companies’ asset valuations and debt-to-EBITDA levels were still below the 2007 level.

Xavier said due to cheap funding, companies could afford to pay shareholders dividends through debt but the companies that were doing so would have to review their strategies with interest rate hike.

He said the Malaysian companies surveyed were able to repay their debt in 1.8 to two years, compared with the regional average of 2.7 to three years.

He also said the companies under review had very polarised appetite for credit risk as 30% of them have substantially high debts while 50% have conservative balance sheets with moderate to low debt.

“It depends on the business and sector they are in. For instance, airline operators tend to have a high debt level because the business model requires high capex to fund the buying of aircraft.”

According to the report, AirAsia Bhd’s financial risk profile is considered “highly leveraged” as the aviation counter’s capex and gearing ratio has been growing while its has negative operating cashflow.

AirAsia is also in a high-risk industry with intense competition and heightened margin volatility such as fuel costs.

“Not specific to any company, some businesses choose to gear up now because funding is cheap and they want to expand to remain ahead in the competition,” Xavier said, adding that some companies were raising funds to lock in lower interest rates because most businesses expected higher costs of borrowing ahead.

Commenting on Malaysia Airports Holdings Bhd’s plan to raise funds to buy the remaining 40% stake in Istanbul Sabiha Gokcen International Airport Investment Development and Operation Inc for RM1.2bil, Xavier said the diversification made sense for the airport operator’s growth strategy to spread out its country risk.

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