The rating upgrade reflects Priceworth Wood Products Berhad (Priceworth) Group’s improving financials underpinned by growing timber extraction activity/contracting services coupled with high operational integration pertaining to its manufacturing activities. The Group’s vulnerability to cyclical developments affecting the timber/wood-based industry remains a moderating factor to the rating.

Recently promoted to the main board of Bursa Malaysia, Priceworth’s principal activities are manufacturing and sale of processed wood products (including sawn timber, barecore board, moulded timber and timber flooring) and timber contracting services. Its timber complex is located at an 81-acre site in Kuala Seguntor, about 16 km from Sandakan, Sabah. Around 95% of its total sales are exported to international markets including Japan, China, Hong Kong, South Korea and the Philippines.

To mitigate supply risk and ensure a constant and reliable supply of logs as raw materials for its downstream activities, Priceworth completed the acquisition of Teras Selasih Sdn Bhd (TSSB) and Cergas Kenari Sdn Bhd (CKSB) in November 2004. These companies are supplier of logs and timber extractor respectively and had been supplying the Group prior to the acquisitions.

Other than the synergistic effects, post acquisition the Group will secure a supply of 418,000 cubic metres of logs p.a. or 2.09 million cubic metres over five years which are more than sufficient to meet the current requirement of 180,000 cubic metres p.a. Consequently, the Group plans to gradually increase its production capacity to 400,000 cubic metres p.a. by the end of financial year 2005.

The high level of plant integration allows Priceworth greater flexibility and control over the conversion process from raw materials into manufactured end-products. The factory is situated just up the mouth of the river Seguntor, facilitating movement of its products for export and transport of raw materials.

Liquidity risk under the payment structure is mitigated through the establishment of a Finance Service Reserve Account (FSRA) and a Sinking Fund. The funds in these accounts shall be utilised to meet any scheduled secondary notes redemption or redemption of the Murabahah Multi-Option Notes Issuance Facility (MONIF) and outstanding primary notes under the Murabahah Medium Term Variable Yield Notes facility (MuraVYN). A Commodity Reserve Account (CRA) mechanism has also been incorporated under the issue structure to provide an added liquidity buffer whereby 50% of any surplus net cash flow in a year (as compared to original projected figures) will be swept into this account.

Priceworth’s revenue rose by 39% to RM175.13 million in fiscal year 2004. However, its operating profit margin declined from 14% to 6% as rising raw material and selling costs outpaced increases in the price of its manufactured products. This partly contributed to Priceworth’s decision to venture upstream by acquiring CKSB and TSSB. Debt leverage remains manageable at 0.53 times, aided by growing profit retention over the past several years. Cashflow has improved and is expected to be boosted by contributions from the acquired companies.