Evermaster Group Bhd - 2003

The ratings assigned are based on Evermaster Group Berhad (EGB)’s expanding activities into government-related construction works, its high operational integration with regard to the wood-based activities and going forward, its focus on downstream higher value-added products.   Other positive factors include the company’s long operating track record and financial performance, particularly in terms of protecting profit margins despite the challenging economic environment.  Moderating factor to the rating is the Group’s vulnerability to cyclical developments in the timber/wood-based industry.  The domestic wood-based industry’s future direction would depend largely on factors such as prevailing external economic climate, import policies of key international destinations, availability of raw materials and increasing threat of product substitution.

Incorporated in 1996, EGB is listed on the main board of the KLSE.  The Group’s principal activity is manufacturing and sale of processed wood products (primarily plywood and moulded timber products) and recently venturing into federal government-backed construction projects.  Its manufacturing plant is located in Keningau, Kota Kinabalu, Sabah.  The current production of the factory is about 54,000 cubic metres per annum.  Raw materials supply, particularly logs, is ensured through a long term agreement with a timber concessionaire company, Daya Jati Sdn Bhd.  The high level of plant integration gives EGB greater flexibility and control over the conversion process from raw material into manufactured end-products.    Marketed under the “Green Frog” trademark and through KOMO S.K.H. certification of product quality assurance guaranteed by Verzekerd Keur of Netherlands BV, EGB is able to command higher premium for its plywood and moulded products respectively when compared to normal market prices.

Evermaster Development Sdn Bhd (EDSB), the Group’s wholly owned subsidiary which acts as the construction arm, had a secured order book of construction works worth around RM35 million as at June 2003; all expected to be completed before end of the year.  This includes contracts to construct schools and residential buildings/complex in several districts including Keningau, Tenom, Kota Belud and Semporna; all awarded by the Federal Government.

The issue structure incorporates, among others, a Commodity Reserve Account mechanism, whereby 50% of any surplus net operational cash flow in a year (as compared to original projected figures) will be swept into this account, providing an added liquidity buffer to cover the market risks associated with timber products. Refinancing risk under the payment structure is mitigated through the serial nature of the facilities and creation of Sinking Funds, which must have a credit balance of at least 50% of the outstanding facilities’ amount, six months prior to the due date(s) of the facilities.  Liquidity risk is mitigated through the maintenance of a secondary note liquidity buffer in the Finance Service Reserve Accounts. 

Despite the reduction in revenue by 23% to around RM50 million in fiscal 2003, mainly as a result of insufficient working capital, EGB managed to maintain its double digit operating profit margin at 14.3%.  Its operating margin averaged 16.7% over the last five financial years.  Debt to equity level stood at a low 0.38 times but is expected to rise to 0.78 times with the issuance of the proposed RM90 million Islamic debt securities.  A maximum debt leverage of 1.25 times has been imposed under the issue structure.  Cashflow protection measures have improved and comparable to its other rated peers and moving forward, will be bolstered by increasing contribution from its expanding construction activities.