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MARC has affirmed its short- and long-term debt ratings of MARC-2 and A respectively on Priceworth Wood Products Berhad’s (Priceworth) RM160.0 million Commercial Papers/ Medium Term Notes Programme (CP/MTN). The affirmed ratings continue to reflect the integrated timber operator’s strong operating track record, a balanced export and domestic revenue base and diversified product lines, which provide relative resilience to economic downturn.
MARC continues to maintain a developing outlook on the rating. While the prospects for the processed wood products industry have notably deteriorated, our earlier concerns regarding Priceworth’s debt maturity profile, in particular its significant upcoming debt maturities have been addressed by a RM125.0 million term loan recently secured by Priceworth. MARC believes that this will alleviate the near-term refinancing risk faced by the company. The term loan has been drawn down and the proceeds have been credited into the debt service reserve account (DSRA), a designated trustee-controlled account set up under the CP/MTN Programme, on February 27, 2009. The existing cash balance of RM5.1 million in the DSRA as of February 26, 2009, should be adequate to meet interest obligations on the notes until actual redemption date while the term loan proceeds sufficiently cover the outstanding notes of RM125.0 million.
Sabah-based Priceworth, through its subsidiaries, mainly manufactures timber-based products, conducts log trading and undertakes timber extraction contracts. The group is also involved in a RM257 million property project in Sandakan, Sabah through its 51%-owned subsidiary, Integral Acres Sdn Bhd. The group has a combined annual production capacity of 492,000 cubic meters annually as of December 31, 2008. About 48% of its revenue is generated from export sales to mainly Japan and China as well as US, Europe and Middle East.
Priceworth’s revenue grew marginally by 3.3% to RM564.9 million during the financial year ended June 30, 2008 (FY2008) on account of higher contributions from its upstream activities of timber extractions and round logs trading. Core revenue generated by its processed wood products dropped by 27.3% to RM282.7 million in FY2008 (FY2007: RM388.9 million) due to weaker sales in its main export markets,
Japan and China. The stronger revenue contribution from the group’s upstream activities has provided an offset to the weaker operating performance of the processed wood product business. Priceworth’s profitability is vulnerable to curtailed access to timber in respect of current timber rights and concessions, of which some are expiring by end-2009. Priceworth’s operating profit margin improved to 7.9% or RM44.5 million in FY2008 (FY2007: 6.4%, RM34.9 million) but narrowed to 6.6% based on the interim six-month period ended December 31, 2008 (1HFY2009), as a result of the weaker performance of its processed-wood product division. Priceworth’s focus on good cash and inventory management is reflected in its healthy cash conversion cycle of 31 days for 1HFY2009. However, its cash balances of RM15.7 million and absence of unutilised cash lines exposes the company to significant refinancing risk vis-à-vis heavy debt maturities over the next 12 months. The later amounts to RM96.5 million, inclusive of the RM35.0 million due under the CP/MTN and RM59.7 million hire purchase payables.
MARC’s ratings on Priceworth’s CP/ MTN Programme will be withdrawn upon confirmation from the Trustee on the full repayment and cancellation of the CP/ MTN facility which is expected to be no later than May 8, 2009.
Major Rating Factors Strengths
One of the largest plywood producer in Sabah; Operational flexibility derived from integrated timber operations and market diversity; Ample log supply derived from own concessions and other log suppliers; and Strong inventory management.
Challenges/Risks Downward earnings pressure from softening demand; Low capitalization limits financial flexibility; and Modest liquidity position.
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