Tracoma Holding Berhad: In Search of Sukuk

M. Badrul Hakimi Daud 1

Mohd Hafizuddin Syah Bangaan Abdullah2
S.Shahida3
A.M. Hafizi4

Research Centre for Islamic Economics and Finance (EKONIS-UKM)

Faculty of Economics and Management
The National University of Malaysia

Case study submitted for presentation at National Case Study Conference (NCSC) 2013
Enriching Research, Developing Learning & Applying Excellence Teaching
21-22 June 2013, Kota Kinabalu, Sabah

Type of case: Teaching case

It was late June 2004 and Datuk Ismail Ahmad the Chief Executive Officer (CEO) of
Tracoma Holdings Bhd was considering to issue sukuk to finance the companys business
expansion. However he was not familiar with sukuk even though a lot of companies
worldwide have issued sukuk as important mode of raising capital. Datuk Ismail Ahmad
wanted to decide which particular sukuk structure that fit the financing needs based on
financial analysis of the company and Malaysian capital market offering. Therefore, Datuk
Ismail called his Chief Financial Officer (CFO) to seek advice from their investment bank in
this regard and prepare report on sukuk structure that available in Malaysian capital market to
be presented within one week.

PhD Candidates, Faculty of Islamic Studies, UKM. (badrul_kimi@yahoo.com)

Lecturer of Finance, School of Business Management, Faculty of Economics and Management, UKM &
postgraduate student (DBA) of UKM-Graduate School of Business. (m_hafiz@ukm.my - corresponding author)
3
Senior Lecturer of Islamic Economics, Banking and Finance, School of Economics, Faculty of Economics and
Management, UKM. (shahida@ukm.my)
4
Lecturer of Finance, School of Business Management, Faculty of Economics and Management, UKM.
(hafizi_m@ukm.my)
2

Malaysian Capital Market

Malaysian Capital market comprises a conventional capital market system operates in parallel
with a well-established Islamic Capital Market. Fast development in this line of industry
making Malaysian Financial Market as one of the largest financial system with assets valued
at RM1.416 trillion (USD$472 billion).

Malaysian conventional capital market offered various instruments to the investors as Islamic
capital market instruments offered a very different instruments. Compare to every
conventional instrument there are always an alternative instruments that Islamic capital
market can offered like securities to syariah compliance securities, bonds to sukuk, REITs to
Islamic REITs, ETF to Islamic ETF and unit trust funds to Islamic unit trust fund. Although
Malaysian Islamic capital market is still in niche period compared to the conventional market
as its growth in 2010 grow at 13.6% compare to the other conventional market that had more
growth percentage. However, Malaysian Sukuk market now is the largest sukuk market in the
world with 64% outstanding share of sukuk at the end of 2010 compared to other sukuk
market in the world.

Sukuk
Sukuk is the plural word of sakk that mean Islamic securities. Literally, sukuk means
certificates that refer to securities, notes, papers or certificates that featuring liquidity and also
tradability. According to the Guidelines on the Offering of Islamic Securities issued by
Securities Commission of Malaysia (SC) in 2004, sukuk refers to a document or certificates
which represent the value of an asset without restricting type of asset representing the sukuk.

Sukuk can be represented by numerous form of contracts divided into four different
based; sales-based, lease-based, partnership-based and agency-based. Under the contract
based, there are various specific types of sukuk structures such as mudharabah, musyarakah,
murabahah, salam, ijarah and others. Therefore, the issuer that was in need of funds will
choose the best sukuk structure fitted to their financial needs. Among the factors are issuers
economic objectives, the availability of assets, company debt level, issuer credit rating, and
the legal framework in the jurisdiction and tax implication of the structure.

Tracoma Holding Berhad Company Background

Tracoma Holding Berhad (Tracoma) was incorporate in 8 June 2000 and listed in Bursa
Malaysia Main Market in 24 July 2002. Tracoma primarily involved in the manufacturing
and supply of metal-based and tubing parts components for automobiles, with local
automotive companies i.e. Proton and Perodua are the main customers. Further, it is also an
investment-holding company that involved in manufacturing and assembling motor vehicles,
and maintenance and engineering services for the shipping as well as oil and gas sectors.
Tracoma has received several awards from foreign car makers for its good product quality
(MARC, 2004) and become the leading manufacturer and supplier of automotive parts and
components in Malaysia.

Nature of Business
Tracoma Holding Berhad involved mainly in the manufacturing and supply of metal-based
and tubing parts components for automobiles. Further, it is also an investment-holding
company that involved in manufacturing and assembling motor vehicles, and maintenance
and engineering services for the shipping as well as oil and gas sectors. Tracoma had
continuously investing in R&D to improve it products and services.
Exhibit 1: Tracomas Financial Profile
Description

31/12/2003

31/12/2004

71267

87896

Depreciation

6559

6104

Operating profit

5813

14518

Net interest charges

1156

1683

Pre-tax profit

5086

13072

Published after tax profit

5230

8398

EBIT

6416

14894

EBITDA

12975

20998

Equity cap. And reserves

94057

101441

Tot. Share capital & reserves

94057

101441

259

368

113811

131668

Total sales

Minority interests
Total capital employed

Tot fixed assets-net

80196

115902

Total intangibles

10840

17721

Total stock

12401

14303

9528

7282

49859

58878

141120

193160

Borrowings repayable < 1 year

11630

23821

Total current liabilities

23886

57665

Net current assets

25973

1213

Total debt

31125

53679

Net debt

21597

46398

101056

99086

Market Value

79200

52320

Dividends per share

0.022

0.043

Book value per share

1.96

2.113

Market to book value exclude

0.95

0.62

Sales per share

1.485

1.831

Cash in -operating activities

7909

25775

Payments: fixed assets

22282

24876

Cash out-investing activities

29536

47223

Cash inflow from financing

13244

19201

Net cash flow

-8383

-2246

Total cash & equivalent

Total current assets
Assets (total)

Enterprise value

Intangible

Need for Capital

The landscape of Malaysian automobile industry has changed when Proton was established in
1985 and consequently Perodua in 1993. Impressively, Malaysia has become the only
developing country at that time to own a full automotive design and engineering
competencies (Malaysian Automotive Association, 2005). One of the immediate impacts due
to the establishment of Proton and Perodua was the strong growth in automotive components
and parts industry. Tracoma is one of the manufacturers to take the opportunities in
automotive sectors by supplying automotive components and parts to Proton and Perodua as
well as several other foreign car makers (Tracoma Holding Berhad, 2010).

Realizing these opportunities and consistent to its mission, Tracoma planned to expand its
operation by entering joint venture agreement (JVA) with local and foreign automotiverelated companies as well as to build a new plant to increase its capacity. However, shortage
of internal funds requires Tracoma to seek external funding to materialize it expansion plan.
The management of Tracoma believed that sukuk is the right option to finance its long term
growth. Datuk Ismail Ahmad wanted to make his recommendation to the board of directors
on the best sukuk structure to be issued by the company at their upcoming meeting, which is
held next week. Hence he directed his CFO to seek advice from their investment bank in this
regard.

References
Bursa

Malaysia

Securities

Berhad.

(2011).

Tracoma

Holdings

Berhad:

Decision in Respect of the Further Appeal Against De-Listing of Securities of

Tracoma from the Official List of Bursa Malaysia Securities Berhad,. Available at
http://www.klse.info/counters/announcements/stock/7147 (accessed 25 May 2012)
International Islamic Financial Market (IIFM). (2010), Sukuk Report: A Comprehensive
Study

of

the

International

Sukuk

Market,

http://www.iifm.net/default.asp?action=category&id=66

1st

Eds.

(accessed

Available
5

at:

September

2010).
International shariah Research Academy for Islamic Finance (ISRA). 2011. Islamic
Financial System, Principal and Operation. Kuala Lumpur, ISRA.
Malaysian Automotive Association. (2005), National Automotive Policy Framework.
Available at www.maa.org.my (accessed 29 October 2011).
MARC. (2004), Credit Analysis Report: Tracoma Holding Berhad-November 2004.
Available at http://www.marc.com.my (accessed 29 October 2011).
Securities

Commission

(2010),

Malaysian

Capital

Market.

Available

at

http://www.sc.com.my/main.asp?pageid=1127&menuid=&newsid=&linkid=&type=
(accessed 13 November 2013)
Tracoma Holding Berhad. (2010), Products and Services of of Tracoma Holding Berhad.
Available at http://www.thb.com.my/ (accessed 16 November 2011)

Teaching Notes

Case synopsis
The case focuses on firm financing decision, i.e. capital structure theory using Islamic capital
market instrument or famously known as sukuk. Datuk Ismail Ahmad is the CEO of Tracoma
Holdings Bhd in Kuala Lumpur which involved mainly in the manufacturing and supply of
metal-based and tubing parts components for automobiles. In late June 2004, he was
considering to issue sukuk, an instrument which he was not familiar with to finance the
companys business expansion. He wanted to decide which particular sukuk structure that fit
the financing needs based on financial analysis of the company and Malaysian capital market
offering. Hence he directed Chief Financial Officer to seek advice from their investment bank
in this regard.

Case positioning:
i.

Target courses/subjects.
a. Level of programme: Undergraduate and postgraduate.
b. Courses: Intermediate and advanced Financial Management, Corporate Finance,
Islamic Financial Institutions and Market, Islamic Capital Market and other
relevant courses.
c. Specific Topics/syllabus: Capital Structure, Corporate Financing, Sukuk.

Learning Objectives:
The student should be able to:

Understand reason(s) of firm financing.

Importance of companys financial profile.

Understand the principle and sukuk structures.

Making a relevant decision.

Questions for Discussion:

By using the available data, compute relevant financial ratios e.g. leverage ratio, total
equity and capital turnover ratio to show companys financial position.

Identify other reasons beside financial factors for this company to issue sukuk.

What are the possible sukuk structure(s) suitable based on the companys financial
profile?

Assuming that you are the CFO, what will be your suggestion to the CEO based on
answers in the above questions?

What will be the final decision of the CEO?

Suggested Response from students:

1. Leverage ratio is the best ratio to identified companys level of debt to the companys
firms assets value. Higher leverage ratio implies higher risk of default if company to
issuing sukuk (Equation 1&2). The ratio shows that Tracoma has adequate leverage
ratio for issuing sukuk to financing their new facility construction since the leverage
ratio of Tracoma at the time is 0.35 below the capped value 1.5 under the issue
structure.

2. Capital turnover ratio gives an indication of how efficient a company utilizing its
assets. The more higher this ratio the better the company (Equation 3). At the time,
Capital turnover ratio has been reach 0.51 shows higher assets utilizing demonstrates
the generating ability of the company assets from selling activity.

3. Tracoma is one of the primary parts suppliers of metal-based and tubing part for
automotive industry in Malaysia. This company had vase of experience in the industry
making them one of the main automotive part suppliers for the most car makers
company in the country like Proton, Produa, Toyota, Honda, Nissan and Volvo. In the
meantime, they are in need of more funds to construct an additional facility to boost
their production. However, the automotive industry in Malaysia are facing toward
vulnerability beside of growing competitive in the sector and manufacturing sector
swings at the time due to the trade liberalization. This will make their sukuk credit
rating affected concerns higher risk of default. The rating however moderated by a
recent event that Tracoma now had set up a new joint venture with Proton to
undertake the manufacture and assembly of Proton models in Indonesia in effort to
expand Proton market in Indonesia and Asia.

4. By analyzing the capability of the companys financial profile particularly in debt to

equity ratio and the companys involvement in automotive industry, it is moderately
recommend for issuing any Sales-Based Sukuk either murabahah or bai bithamin ajil.

___________________________________
Equation 1:
= & +
= 94057 + 259
= 94316

Equation 2:
Leverage ratio =
= 31125 94316
= 0.33

Equation 3:
Capital turnover ratio =
= 71267 141120
= 0.51