The rating reaffirmation of Merbok Hilir Berhad’s (Merbok) RM150.0 million Al-Bai’ Bithaman Ajil Serial Bonds (BBA Bonds) at AID is reflective of Merbok Group’s proven track record in the MDF industry and its fairly robust financial position. Moderating factors, however, 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 530,000m3, the Group is the largest MDF manufacturer in South East Asia, representing 25% of Malaysian capacity and 11% 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. Although usage of MDF in the South East Asian market is still limited, in Malaysia and Indonesia mainly due to familiarity and preference towards plywood and sawn timber, the utilization rate of MDF 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 Malaysian home market absorbs 25% of the Group’s output. The remainder of the Group’s products are primarily exported to the Middle East (64%), India (15%), China (10%) and others (12%). Other export countries include Pakistan, Sri Lanka, Indonesia and Mauritius.

Fiscal 2004 saw Merbok Group’s profit before tax declined by 70.6% to RM4.7 million. This was mainly due to the losses suffered by Merbok MDF as a result of lower output arising from log shortage, non-consistent quality and low output levels from its particle board division. The losses were aggravated by technical problems experienced by Merbok Lanka.

Nevertheless, during the first 9 month period of 2005, the Group’s performance has improved with revenue and profit before tax at RM304.13 million and RM13.78 million respectively, representing a 14.8% and above 100% increase respectively compared to the previous year’s corresponding period. In early 2005, the Group reorganised its particleboard manufacturing activities, downscaled the mobile chipping operations and resolved technical constraints at Merbok Lanka in its efforts to improve performance. Going forward, following the various reorganisations, the Group expects steady improvement in its profitability levels.

As at September 2005, Merbok’s debt leverage has decreased to 1.01 times due to the repayment of its term loans. A maximum debt-equity level of 1.75 times has been imposed under the issue structure.