Maxtral Industry Bhd - 2007

MARC has reaffirmed its MARC-2/AID rating for Maxtral Industry Berhad’s (Maxtral or the Group) RM80-million Al-Bai Bithaman Ajil Islamic Debt Securities (BaIDS) and RM20-million Murabahah Underwritten Notes/Murabahah Medium Term Notes (MUNIF/MMTN) facilities. The rating carries a stable outlook. The affirmation reflects Maxtral’s satisfactory operating performance, moderate debt leverage and relatively strong cash-flow coverage ratios. These strengths are moderated by Maxtral’s exposure to the underlying cyclicality of the timber industry. Additionally, the wood-based industry is also sensitive to changes in domestic as well as international regulatory policies relating to export quotas, environmental-based certification and quality standards.

Maxtral is a Sabah-based integrated timber player involved in the manufacture of veneer, plywood and moulded products, and log trading. The Group’s emphasis on product quality through compliance with international standards enables it to command a premium on selected products such as plywood and veneer. Maxtral’s timber processing facility, which is strategically located along a bank of Sungai Sibuku in Tawau, Sabah, facilitates the handling and transportation of raw logs as well as its timber products while its highly integrated factory provides the Group with greater flexibility and control over the conversion process from raw materials into manufactured products. Maxtral procures its logs through long-term purchase undertaking agreements with two concession holders, providing some measure of stability in terms of log cost in addition to supply. Meanwhile, to diversify its earnings, Maxtral had acquired a piece of land in Ranau, Sabah, measuring 1,195 hectares for cultivation of commercial crops, and a piece of land in a prime area of Kuala Lumpur around May 2007 for the purpose of high-end residential development. The proposed project has a potential gross development value of RM225 million.

For the nine months ended 30 September 2007, Maxtral’s revenue dropped to RM77.2 million as compared to the corresponding period in 2006 of RM165.8 million on the back of lower sales volume. The Group’s pre-tax profit was RM11.26 million against RM14.77 million for the corresponding period in FY2006. However, the Group’s operating profit margin improved to 22.4% (3Q2006: 11.34%), on account of an increased sales mix of products with higher margin such as plywood and veneer. The log trading business remained the largest contributor to the Group’s total revenue, at 58.3% or RM45.0 million, of which around 86.0% was derived from local sales.

The debt leverage level stood at 0.52 times as at 30 September 2007, well below the covenanted debt-to-equity ratio of 1.50 times under the issue structure. As of 30 November 2007, the balance of the Commodity Reserve Account was RM7.7 million whilst the balance of the Finance Service Reserve Account was RM3.30 million. The balances in the designated account provide support for Maxtral’s April 2009 MUNIF/MMTN principal repayment in addition to its cash and bank balances of RM15.56 million as of September 2007.

The stable outlook is based on the expectation of sustained demand from Maxtral’s established and wide customer base and operating performance stability.

Major Rating Factors

Strengths

• Satisfactory profitability backed by stable log supply and established customer base;
• Integrated timber operations facilitate operating efficiencies; and
• Company’s financial policies and moderate capital structure support strong cash flow protection measures.

Challenges/ Risks

• Cyclical and highly competitive timber industry.