Weida (M) Bhd - 2008 / 2009

MARC has affirmed its MARC-1ID / A+ID ratings on Weida (M) Bhd’s RM100 Million Murabahah Underwritten Notes Issuance / Islamic Medium Term Notes Facility. The rating outlook remains stable. The rating reflects Weida’s competitive position as a fully-integrated leading provider of water- and wastewater-infrastructure products and services, particularly in East Malaysia, its proven track record and stable financial performance. These strengths are offset by exposures to the construction and property development cycles as well as cross-border risks posed by its initial foray into Syria.
 
Weida has enjoyed stable and consistently improving performance over the years owing to the competitiveness of high-density polyethylene (HDPE) engineering products produced by its manufacturing division, the company’s core division, which contributed 46% to total revenue in financial year ended March 31, 2008 (FY2008). The group’s HDPE-based products - which include HDPE storage tanks, treatment systems and pipes - possess superior physical advantages compared to their more common, steel-based counterparts and as a result are becoming a standard replacement for existing steel-based water- and wastewater infrastructure products. With knowledge and expertise in HDPE-based engineering, Weida has earned itself a strong reputation as a design-and-build turnkey contractor for HDPE-based water- and wastewater- infrastructure projects. In FY2008, the group was able to secure projects to construct water and sewage treatment plants for the Syrian government for a total contract value of EUR60.0 million1. Maiden revenue contributions from these projects is expected to begin in FY2009.

In addition to its core operation, the group’s improving performance is also attributed to the strong growth of its telecommunication tower division, which constructs towers in East Malaysia for various local telecommunication service providers. This division contributed 27% of total group earnings in FY2008. Meanwhile, Weida’s new plantation division comprises oil palm cultivation in central Sarawak spanning 6,500 hectares, 800 hectares of which have been cleared for cultivation since June, 2008. Weida expects to see its first harvest by FY2012 at the earliest.

During FY2008, Weida’s sales turnover rose 6.2% to RM198.9 million (FY2007: RM187.3 million) , with relatively unchanged operating profit margins. The group continues to register steady performance despite the current weak economic environment, as reflected in its latest interim results as of December 31, 2008 (3QFY2009) with higher quarter-on-quarter sales revenue and operating profits of RM220.20 million and RM24.03 million compared to RM145.65 million and RM15.65 million in 3QFY2008. MARC believes that Weida’s HDPE sales will continue to be supported by development in rural areas particularly in East Malaysia, which stand to benefit from government spending allocation for infrastructural development and a sum of RM1.4 billion for the funding of rural housing projects. Aside from HDPE sales, group earnings will likely be further supported by new telecommunication tower projects under the government’s next service-coverage plan, the Time 3 Programme.

Weida’s outlook is underpinned by its stable financial flexibility and its stronger cash position as a result of recovering a large sum of contract receivables from its telecommunication tower projects. This is evidenced by the group’s 3QFY2009 operating cashflows, which turned positive to RM82.98 million in 1H2009 reversing a trend of cashflow deficits since FY2006. Group debt-equity ratio, which stood at 0.79 times as at September 30, 2008, is believed to remain stable as planned capital expenditure is moderate. Although the group’s debt-service and coverage ratios have been negative over the past three years due to intensive working-capital needs in construction, it has demonstrated the ability to recover its working-capital investments and effectively maintain adequate debt-protection levels.

Major Rating Factors

Strengths

• Established player in the supply of HDPE engineering products to the water and wastewater infrastructure industry; and
• Recurring income from existing telecommunication tower projects.

Challenges/Risks

• Exposure to economic uncertainty in the construction industry; and
• Capital expenditures on non-revenue generating assets such as oil palm plantations.