Local corporates fared better in riding out short business disruption

by FARA AISYAH/ graphic by MZUKRI

MALAYSIAN corporates have a stronger financial footing with better liquidity and debt servicing capacity in the first quarter of 2020 (1Q20), compared to regional peers in Singapore, Thailand and Indonesia, observes RAM Rating Services Bhd (RAM Ratings).

The rating agency analysed the performance of 721 non-financial firms listed on Bursa Malaysia that reported results in 1Q20.

“Tracked indicators include earnings performance, debt levels and servicing aptitude, and liquidity.

“The overall findings concluded that corporate firms started the lockdown with relatively sound balance sheets, with headroom to ride out a short recession,” RAM Ratings said in a statement yesterday.

It said weaker earnings were already evident from 4Q19, in line with moderating economic growth.

Earnings before tax for the median company in the agency’s study sample shrank 11% year-on-year in 1Q20.

RAM Ratings said further anecdotal evidence suggested a deeper slump, by up to 35% quarter-on-quarter in 2Q20 at the peak of the Movement Control Order (MCO).

It added that the median company had cash reserves to support about three months of operations going into the MCO.

Firms had been also quick to slash operating expenses to conserve cash; preliminary evidence for some firms indicated their cash reserves increased to some 3.6 months of operations in 2Q20.

RAM Ratings said another métier of corporate firms is their moderate debt levels.

The sample’s median gearing ratio stood below 0.25 times as at end-March 2020.

Thus, even with lower earnings, debt-servicing aptitude — as measured by the ratio of Ebitda to debt — remained adequate at a median of 0.21 times in the same period.

Meanwhile, RAM Ratings expects the negative bias to its rating actions to remain in the next few quarters due to the prevailing economic uncertainties.

It added that sectors that remain vulnerable include tourism, leisure and hospitality, aviation, retail, and oil and gas. “We estimate that currently, about 5.7% of our portfolio is at higher risk of default, under a worst-case scenario.

“Financial challenges induced by lockdowns on firms continue to corral rating actions into bearish territory,” the rating agency said yesterday.

In the first half of 2020 (1H20), about 4% of RAM’s total rated issuers received negative rating actions including downgrades or changes in outlook.

However, the agency stressed that overall credits remain hale, with over 80% of RAM Ratings-rated issuers are low-risk with a stable outlook.

RAM Ratings’ 1H20 Corporate Default and Rating Transition report noted that its outstanding portfolio stood at RM748.4 billion by programme value during the period.

In terms of credit quality, 83% are AA or higher ratings, while sector-wise, the portfolio remained anchored by financial services (64%) and infrastructure and utilities (16%).

The rating agency said although no default was recorded in this period, rating actions on the whole in the 1H were more negative due to the adverse economic impact of the pandemic.

“Broad-based recovery in Malaysia is unlikely this year as most industries are still operating below capacity.

“Going forward, deflation will be the overarching theme in 2020 due to all-time low oil prices and policies to shore up consumption,” RAM Ratings said.

RAM Ratings projected Malaysia’s GDP to end the year at -4% in 2020, with the economic recovery expected to gain a small positive traction in 2021.