The rating of AID assigned to Merbok Hilir Berhad’s (Merbok) proposed RM150.0 million Al-Bai’ Bithaman Ajil Serial Bonds (BBA Bonds) is premised on the Merbok Group’s proven track record in the highly competitive MDF industry, the favourable outlook of the international Medium Density Board (MDF) industry, as well as its well-capitalised balance-sheet. However, the balancing factors taken into consideration include the inherent risks of such commodity-based industry, high capital requirements driven by rapidly evolving technology and price competition of the manufactured products.

With an annual-rated production capacity presently at 450,000m3, the Group is the largest MDF manufacturer in South East Asia, representing 25% of Malaysian capacity and 6.5% of the South East Asian production capacity. MDF is a non-structural panel made of wood fibres bound together with adhesives under heat and pressure. It has been successfully used in the manufacture of furniture and fittings as an alternative to the traditional plywood. The projected inability of North American countries to produce enough plywood to meet demand will create a “plywood deficit” which is not expected to be fully met by plywood imports from South East Asia. Hence, alternative panel products will play a growing role in meeting North American needs. Japan, Taiwan, Korea and China, which do not have the wood resources to keep production in pace with demand, are expected to continue to be major net importers of MDF. Although usage of MDF in the South East Asian market is still limited, particularly in Malaysia and Indonesia mainly due to familiarity and availability of plywood and sawn timber, the utilization rate is expected to pick up in the near future as availability of these natural resources diminish. It is anticipated that such developments would augur well for Merbok, going forward.

The Group`s production facilities are located in Kedah (Merbok and Bukit Selambau factories), in Johor (Pasir Gudang factory) and in Sri Lanka (Horana factory). Sales of the Group`s products are co-ordinated through its sales and marketing team based in Penang, Malaysia. The Group distributes its products internationally through a network of agents and distributors. The Group’s products are primarily exported to the Middle East (40%), China/Taiwan/Hong Kong (20%), and Korea, Japan and South East Asia (15%). The Malaysian home market absorbs around 15% of the Group’s output while the balance is exported to other international markets.

In fiscal 2002, overall sales increased by 13.7% to RM264.2 million from RM232.4 million previously. Merbok’s profitability, however, declined by 10% and 14% at pre and post-tax level respectively, mainly due to substantially higher financing and depreciation costs. Going forward, the Group expects to record higher sales, boosted by additional capacity from its particleboard and overseas/Sri Lankan operations.

MARC views the company’s well-capitalised balance sheet positively. Retained earnings have consistently grown over the years, which nearly tripled in four years to RM146 million in FY2002 (FY98: RM54 million). Merbok had geared up in FY2002 to cater for the acquisition of the particleboard factory and installation and commissioning of its own resin manufacturing facility, both located in Kedah as well as the plant expansion involving a second production line of its MDF manufacturing facility in Horana, Sri Lanka. Based on the FY2002 shareholders funds of RM226 million, its pro-forma gearing ratio will rise to around 0.9 times upon issuance of the RM150 million BBA Bonds. A maximum debt-equity level of 1.75 times has been imposed under the issue structure.