MARC has assigned a short term rating of MARC-2ID to M-Trex Corporation Sdn Bhd’s (MCSB) proposed 7-year RM60 million Islamic Commercial Paper Programme under the financing principle of Murabahah. The rating is premised on MCSB’s position as the leading local manufacturer of anodised aluminium panels for the mid to high end audio video equipment market; exclusive agency rights to distribute car automobile accessories and consumer products; and a robust financial cash flow. The rating is, however, moderated by the Group’s narrow customer base, exposing itself to concentration risk and the non-existence of long-term contractual supply agreements.

Recently, the company underwent a corporate restructuring exercise involving the consolidation of four companies and their respective business activities. MCSB is an investment holding company with interests in the manufacturing and sale of anodised surface treated panels for the audio and video equipment and the trading of replacement and consumable parts for the automobile and semi conductor industries. The manufacturing and trading activities are undertaken by its wholly-owned subsidiaries Jooei Industry (Malaysia) Sdn Bhd and M-Trex Malaysia Sdn Bhd respectively. Proceeds from the commercial paper programme will be utilised to finance MCSB’s expansion programme, to refinance the existing outstanding loans of the Group and its subsidiaries and for working capital purposes.

The Group currently operates one manufacturing plant in Ipoh, Perak with a maximum capacity of 1.6 million pieces of aluminium panels per year. Part of the proceeds will be used by MCSB to expand its business and plans are underway to build a second manufacturing plant adjacent to the existing one, also with an annual production capacity of 1.6 million units of audio panels. Locally, the Group has identified only one other company based in Penang which operates in a similar industry with MCSB. With an annual production capacity of 240,000 pieces of audio panels, MCSB’s production capacity is still significantly higher. For FY2004, MCSB is expected to produce approximately 1.3 million pieces of aluminium panels, an increase of 19% from the previous year’s output, on the back of the new orders secured from its latest customer, Sony Malaysia.

MCSB’s profits have shown an increasing trend, between FY2000 and FY2003, reflecting continued growth in revenue. The continued improvement in the Group’s profitability is, to certain extent, due to its ability to contain its operating costs. For FY2003, growth in operating costs (cost of sales) was 6% compared to the 11.1% growth in revenue. Barring any unforeseen circumstances, the Group is projecting an average 18% annual growth in revenue over the next 3 years. We believe this is within reach given that the Group has managed to secure new customers for its audio panel business.

Following the first drawdown of RM44 million of the proposed RM60 million commercial paper programme, the Group’s debt leverage is expected to rise substantially to 1.17x in FY2004 from 0.7x in fiscal 2003. Nevertheless, this is still below the debt leverage cap of 2.0x imposed under the issue structure. Assuming a full drawdown, the debt leverage ratio would increase to 1.60x still significantly lower than the covenanted debt leverage. Under MARC’s sensitivity analysis, MCSB’s projected cash flow was found to be resilient even after being subject to several sensitivity analyses.