Priceworth Wood Products Bhd - 2007

Strengths

• Stable earnings performance from timber product sales over the past 5 years
• Highly integrated operations and a production capacity which places it among the top five manufacturers of processed wood products in Sabah 
• Diversified range of products and customer base

Challenges/Risks

• Uncertainties posed by its maiden venture into property development activities
• Sufficiency of log supply from the current concessions to meet higher scale of production
• Susceptibility to timber/ wood based industry cycles

Rationale                     MARC has reaffirmed Priceworth Wood Products Berhad’s (“Priceworth” or the “Group”) RM160 million Commercial Papers/Medium Term Notes ratings of MARC-2 and A respectively. The ratings carry a Developing Outlook. MARC views Priceworth’s vulnerability to cyclical developments affecting the timber/wood-based industry and share repurchases as a moderating factor to its current ratings. The affirmed ratings reflect the nature of the Group’s highly integrated operations, its modest competitive position and improved financial position after several quarters of favourable market conditions for manufactured wood based products.

The Developing Outlook incorporates uncertainties surrounding Priceworth’s foray into property development activities. Through its 51% subsidiary, Integral Acres Sdn. Bhd. (IASB), the Group will undertake a mixed property development on approximately 100 acres of reclaimed land valued at RM116 million in Sandakan, Sabah. In consideration for the land ownership totalling 80 acres; IASB is required to complete 1000 units of low cost apartments valued at RM53 million and surrender them to MPS/ Sandakan Municipal Council. Notwithstanding the gross development value of around RM294 million which will generate additional revenue averaging nearly RM60 million annually over the next four years, this represents Priceworth’s maiden venture into a relatively large scale property development, although mitigated to some extent by its 49% JV partner, Campo Sdn. Bhd., an experienced contractor in Sabah and financing support secured from Sabah Development Bank Berhad (SDB).

Priceworth’s principal activities include manufacturing and sale of processed wood products (i.e sawn timber, plywood, moulded timber, barecore board and timber flooring) and timber contracting services.  Its integrated timber complexes are located on two sites; an 81-acre site in Kuala Seguntor (about 16 km from Sandakan) and an 118.74-acre site in Batu Sapi (about 20 km from Sandakan). Including recent additions to production capacity, the Group has a combined production capacity of 372,000 cubic metres annually. By February 2008, the production capacity will be further expanded to 408,000 cubic metres per annum. Around 85%-90% of the Group’s total sales are exported to international markets including Japan, China, Hong Kong, South Korea and the Philippines. Two of its subsidiaries, Cergas Kenari Sdn Bhd (CKSB) and Teras Selasih Sdn Bhd (TSSB), currently hold the rights to extract and trade timber logs in two concession areas in Sandakan, Sabah. While existing concessions are expected to sustain internal consumption for another two to three years based on current logs requirement, the Group has recently secured a new 979 hectares concession area in Pinangah Forest Reserve which will be extracted on a selective logging basis over a 50-year period.

The Group recorded revenue of RM137.99 million and pre-tax profit of RM2.77 million for the three month period ended September 30, 2007 (Q1,2008).

Cash outflow in the near term is projected to be sizeable based on the planned capex which will be funded by internally generated cash flow while property development expenses will be funded via the bank facility secured from SDB. Nonetheless, funds generated from its enlarged operations should be sufficient to service the Group’s immediate debt obligations. As at September 30, 2007, the Group’s leverage as measured by its debt to equity ratio stood at 1.16 times, within the covenanted gearing level of 1.50 times.