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Were There Warning Signs For Megan?

Monday, May 7, 2007

My Dearest Moo Moo Cow,

Were there warning signs for Megan?

I believe that has got to be one big under statement! Perhaps those who have vested interest in the stock, Megan Media, would discounting my views because I was being too critical and pessimistic and I had always based my investing perspective on the issue of debts and receivables. Anyway, my dearest Scouser had in fact posted a clear warning at Sahamas back on 25th July 2006 (click
here).

It details RAM downgrading Memory Tech's rm320 million debts notes to negative! How ironic because Memory Tech and MJC are the subsidiaries of Megan which had defaulted on its loan payments!

  • Rating Agency Malaysia Bhd has revised the rating outlook on Memory Tech Sdn Bhd’s (MTSB) RM320 million bai’ bithaman ajil Islamic debt securities (BaIDS) (2005/2012), from stable to negative.

    RAM said on July 25 that the BaIDS is currently rated A2 by RAM and carries a corporate guarantee from MTSB’s holding company, Megan Media Holding Bhd.

    As MTSB is the main contributor of the Group’s earnings, the rating essentially mirrors Megan Media’s business and financial profiles.

    "The negative outlook reflects RAM’s concerns about Megan Media’s rising debts to support its capital spending and the prevailing industry depression.

    "The increase in borrowings has resulted in a lower-than-expected debt coverage ratio, and could lead to non-compliance of 2 financial covenants in the Trust Deed for the BaIDS (depending on the interpretation of specific key clauses in the Trust Deed)," it said.

    RAM said the management was negotiating with the BaIDS holders to address this issue prior to the release of its financial statements for FY ended April 30, 2006 (FY April 2006), so as to avoid an event of non-compliance altogether.

    Additionally, the squeeze in the Group’s margins reflected the dynamism and volatility of the blank-data-storage media industry, which offers less comfort vis-a-vis the stability of Megan Media’s earning capacity.

    Megan Media could also embark on more aggressive capital spending to fuel its expansion into HD-DVD and Blu-Ray technologies, which may yield higher margins.

    Financially, Megan Media performed well in FY Apr 2006 and was able to meet RAM’s earlier expectations. It posted a RM249.64 million operating profit before depreciation, interest and tax (OPBDIT) on the back of RM1.03 billion of revenue.

    "That said, RAM notes that the global blank-data-storage media industry remains volatile and fast-paced, thus exposing Megan Media to industry fluctuations. This was evident from the numerous challenges faced by the Group in FY Apr 2006 (e.g. increases in polycarbonate prices and lower average selling prices for DVD-Rs due to global oversupply)," it said.

    Meanwhile, Megan Media’s borrowings increased to RM838.91 million as at end-FY Apr 2006 from RM647.16 million a year earlier, well above the peak of RM700 million that had been anticipated for the tenure of the BaIDS (This is not an imposed limit nor a covenant of any lender to Megan Media).

    RAM said the additional debt, mainly utilised for the purchase of new plants and machinery as well as for working capital, had augmented the Group’s ratio on total debt to equity to 1.78 times, while pushing up its ratio on total debt to earnings before interest, tax, depreciation and amortisation (EBITDA) to 3.35 times.

    Megan Media is currently considering options to reduce its debt burden; RAM will closely monitor further developments on this matter.

    RAM notes that the rating outlook could be revised to stable if the Group successfully reduces its gearing level and the industry shows sign of recovery. On the other hand, the rating could be lowered if Megan Media’ s net debt continues to rise and its debt-protection measures weaken as a result of increased capital spending.

Another thing. I find it incredible that somehow despite this RAM warning, Megan managed to increase its debts by another 50 million! Incredible! What were their bankers thinking off?

How? Wasn't RAM warning good enough?

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