Goodway Integrated Industries Bhd - 2008 / 2009

MARC has affirmed its MARC-2ID/AID ratings on Goodway Integrated Industries Berhad’s (Goodway) RM80 million Murabahah Notes Issuance Programme/Islamic Medium Term Notes (MUNIF/IMTN) Programme and at the same time revised its outlook to developing from stable. The ratings reflect Goodway’s competitive position as the largest domestic producer of rubber compounds and as a market leader in retreading services, its strong distribution network, and scope for additional business from its recent expansion into China. The joint venture in China involving supplying products and providing retreading services for a local commercial transport company is expected to generate stable demand in the lacklustre economic environment. Moderating the ratings are price and margin fluctuations resulting from volatile raw material prices, limited financial flexibility and low plant capacity utilisation.

The developing outlook on the ratings reflects expectations of margin improvement with declining input prices beyond the current quarter (1QFY2009) and resilience in the trading performance of its commercial retreading business. The company has continued to maintain an adequate liquidity position despite recent margin pressures, which has enabled its overall financial risk profile to remain largely consistent with its rating category.

Goodway’s principal activities are the development, manufacturing and distribution of tyre compounds and related rubber products and tyre retreading services. Rubber compounds made-up 70% of sales in FY2007. The group has an extensive distribution network covering markets in US, Europe and Asia. In an effort to ensure supply and manage volatile raw material prices, the group ventured into trading of SMR20 grade rubber (Standard Malaysian Rubber) in FY2008.

For the financial year ended December 31, 2007 (FY2007), Goodway recorded an increase of 32.8% in revenue to RM208.8 million, attributed to stronger global demand and higher selling prices for its rubber compounds and retreading services. Notwithstanding, operating margins dipped to 6.3% from 7.1% in FY2006 owing to higher raw material costs and time-lag in passing on the rising costs to customers. The group recorded weaker free cash flows due to continued capital investments to maintain its competitive advantage and market position in the rubber compounds and retreading services sector. This situation is unlikely to be reversed in FY2008 as Goodway spent RM11.0 million for investments for upgrading of plant and machinery.

For the nine month period ending September 30, 2008 (9MFY2008), revenues surged 40% to RM213.9 million (9MFY2007: RM152.6 million) mainly led by contribution from the rubber trading division while core business grew by 8%. Operating margins declined to 3.5% compared to 7.9% for the corresponding period last year, largely affected by the surge in rubber prices in the first half of 2008 to a high of RM7.00/kg. Margin compression, low core business growth and high finance and depreciation charges resulted in pre-tax profit declining significantly to RM1.0 million (9MFY2007: RM7.2 million). Gearing levels remains largely unchanged at 1.59 times (9MFY2007: 1.56 times), close to its covenanted 1.75 times. With the early redemption of RM10 million IMTN in January 2009, gearing is expected to moderate. A revision in the outlook to stable from developing could ensue if profitability levels return to previous levels, revenues exhibit resilience and the company continues to demonstrate commitment to reduce its leverage to more moderate levels.

Major Rating Factors

Strengths

• Leading domestic rubber compound manufacturer and retreading service provider; and
• Competitive cost position supported by strategically located plants.

Challenges/Risks

• Limited financial flexibility due to high gearing;
• Susceptibility to margin compression in times of rising raw material prices; and
• Low utilisation rate of Goodway’s plants.