Malaysian corporates in good stead to ride out recession: RAM Ratings

PETALING JAYA: RAM Ratings has found that corporates started the movement control order (MCO) with relatively sound balance sheets and have sufficient headroom to ride out a short recession, based on its “Corporate Default and Rating Transition Study” to assess how they fared amid the Covid-19 pandemic.

The study tracked the performances of 721 non-financial firms listed on Bursa Malaysia that reported results in first-quarter 2020 (Q1’20), using indicators such as earnings performance, debt levels and servicing aptitude, and liquidity.

The rating agency pointed out that weaker earnings were already evident from Q4’19, in line with moderating economic growth.

It calculated earnings before tax for the median company in the study sample shrank 11% year on year in Q1’20.

“Further anecdotal evidence suggests a deeper slump, by up to 35% quarter on quarter (qoq) in the second quarter at the peak of the movement control order,” it said in a report.

RAM Ratings said the median company had cash reserves to support about three months of operations going into the MCO.

However, firms have been quick to slash operating expenses to conserve cash. Preliminary evidence for some firms indicates their cash reserves increased to some 3.6 months of operations in the second quarter of the year.

The agency also said another métier of corporate firms is their moderate debt levels, with the sample’s median gearing ratio standing below 0.25 times as at end-March 2020.

“Thus, even with lower earnings, debt-servicing aptitude (as measured by the ratio of earnings before interest, tax, depreciation and amortisation to debt) remained adequate – at a median of 0.21 times in the same period.

“These metrics suggest that corporates at large have some headroom to ride out a short retardation in business, fortified by various fiscal stimuli and financial relief measures,” said RAM Ratings.

“A comparison with regional peers in Singapore, Thailand and Indonesia also points to Malaysian corporates having a stronger financial footing – they were generally lower-geared with better liquidity and debt servicing capacity in 1Q 2020.”

With that it projected Malaysia’s gross domestic product to contract by 4% this year, with a moderate rebound in 2021.

Although uncertainties will still prevail through the rest of the year, the agency opined that the relative health of Malaysia’s corporate and business sectors will no doubt contribute to a quick economic recovery.

source https://www.thesundaily.my/business/malaysian-corporates-in-good-stead-to-ride-out-recession-ram-ratings-YD3647221