KUALA LUMPUR: RAM Rating Services Bhd has maintained its negative outlook on the country’s manufacturing and shipping sectors despite better economic prospects, as the operating environment in those sectors remains challenging.

The rating agency, which just released its CreditPulse for 2010, said the pick-up in global trade and consumption was expected to lag behind the capacity expansion in the shipping industry over the medium term, providing “limited cheer” to shipping operators.

“We have therefore maintained a negative outlook on this industry. RAM believes that the operating conditions for the broad manufacturing sector also remain tricky; there is a lot of ground to cover after the 9.3% plunge in economic output from that sector in 2009,” it said.

It added, however, the experience would vary within the diverse playing field of manufacturers, such as between the electrical and electronics sector and the rubber glove makers.

Speaking to reporters after RAM’s Investor Breakfast Meet 2010 here yesterday, its deputy CEO Chong Kwee Siong also said its outlook across the sectors this year was better than last, which saw five sectors with negative outlooks, compared to the two this year.

The rating agency coverage of rating outlooks encompasses 13 sectors. Apart from the two negative outlooks, 12 sectors have a stable outlook and one has a developing outlook, Chong said.

Among sectors with the brightest prospects is the telecommunications sector (stable outlook), which traditionally displays resilience against economic downturns.

Chong said while the entrance of new players would intensify competition among mobile operators and WiMAX players, broadband was expected to take centre stage this year, with the rollout of high-speed broadband providing an avenue of growth in telcos’ revenue and profits.

Other sectors with bright prospects included the retail sector, with retail sales expected to recover to pre-2009 levels, although retailers’ profitability would remain subdued as they continued to cater to thrift-centric consumers, he said.

“Uncertainties about inflation and price structures may affect consumer sentiments,” he said.

He said the residential property sector (stable outlook) was poised for recovery, supported by economic growth, pent-up demand from the past two years and conducive interest rates.

On residential property players’ credit trends, he said they were expected to see higher revenue and profits, on an expected slight improvement in margins, underpinned by more robust sales and property launches.

The construction sector (stable outlook) was expected to grow 3.9% this year, supported by ongoing pump-priming measures and the pick-up in the property sector, he said.

He said factors influencing the sector’s credit trends were expectations of more contracts available, providing opportunities for order book replenishment, although profit margins would remain challenging under the open tender system.

Meanwhile, sectors in the limelight this year include the power (stable outlook), tolled road (stable outlook) and water (developing outlook) sectors, which are subject to government intervention.

Chong said in Peninsular Malaysia, the focus on the power sector remained on the tariff review and power purchasing agreement negotiations, while additional hydro-powered capacity would be coming on-stream in Sarawak.

“Any PPA (power purchase agreement) renegotiation is viewed to have equitable treatment of all stakeholders and bondholders. Demand certainty and tariffs will be crucial to Syarikat Sesco Bhd’s cash flow, in light of the larger plants,” he said.

Sesco is responsible for the generation, distribution and transmission of electricity in Sarawak.

On the tolled roads sector, he said the new structure of toll rates restructuring was expected to reflect a balance between the impact of toll hikes on the broader economy and reducing subsidies to trim the country’s budget deficit.

He added any decision on toll rates was not expected to affect the credit rating of toll road companies’ bond ratings, with stakeholders and bondholders expected to be fairly treated also.

As for the water sector, he said the full consolidation of the country’s water assets was expected to remain a long-drawn affair, while credit trends in the sector included the early redemption of bonds for some concessionaires if the restructuring was completed.

He also said some water companies could retain their role as operators, while the fate of their investment holding companies would depend on the outcome of negotiations involving their subsidiaries.

Other notable sector outlooks were for the oil palm plantations (stable outlook), with crude palm oil prices expected to range between RM2,400 and RM2,800/tonne this year.

Chong said CPO prices were expected to strengthen “at some point” amid tighter supply due to weather effects and resilient demand from developing economies, adding however, this would be moderated by an increased supply of world vegetable oils.

He said planters here were expected to see healthier earnings this year, and while production costs could increase due to higher fuel, labour and fertiliser costs, these were not likely to negatively affect their credit ratings severely.


This article appeared in The Edge Financial Daily, March 10, 2010.