Weida (M) Bhd - 2009

MARC has affirmed its MARC-1ID/A+ID ratings on Weida (M) Bhd’s (Weida) RM100 Million Murabahah Underwritten Notes Issuance/Islamic Medium Term Notes Facility. The rating outlook is maintained at stable. The affirmed ratings reflect Weida’s strong market position in its core business of High Density Polyethylene Engineering (HDPE) product manufacturing, improved business line and geographic diversity with its successful diversification into infrastructure construction, as well as the maintenance of assets in the waste-water industry and the telecommunication tower segment. MARC believes that Weida’s expansion strategy will improve its earnings stability and increase its resilience to downturns in business cycles. Similarly, MARC expects Weida’s foray into oil palm cultivation to benefit its earning profile in the longer run. In the near term, MARC views Weida’s expansion strategy as aggressive, considering the size of committed capital spending relative to the group’s internal cash flow generation. A weakening in Weida’s credit metrics could arise on an increase in its consolidated leverage to fund growth-related capital spending.

Sarawak-based Weida has maintained its sizeable domestic market position for HDPE products although revenue contribution from the manufacturing segment as a proportion of total group revenue has declined due to increased earnings from other business segments. These include its construction of telecommunication (telco) towers in Sabah for the three dominant domestic telco players for which it receives steady rental revenue upon leasing them. The group has also secured a 25-year contract to manage, operate and maintain the Matang Septic Sludge Treatment Plant in Kuching, which provides the group with annuity stream of cash flow. The group’s overall consolidated revenue for the financial year ended March 31, 2009 (FY2009) was bolstered by contributions from an EUR60 million project to construct 15 water and 26 sewage treatment plants in Syrian Arab Republic (Syria). MARC considers the risks associated with the Syrian project, which is expected to be completed by December 2010, to have been considerably mitigated by the project’s nature as a government-to-government initiative coupled with its relatively short remaining construction period.

Weida has expanded its HDPE manufacturing operations to Philippines by setting up a plant in Manila at a cost of RM8 million with a manufacturing capacity of 960 MT per annum. The plant commenced operations in January 2009.  MARC views this expansion as positive given the limited scope for domestic expansion of HDPE products and the high market potential for the use of HDPE products due to the Philippines’ relatively underdeveloped water and sewage treatment infrastructure.

Of greater concern is the group’s foray into oil palm cultivation in Sarawak through its acquisition of two companies for RM18 million with a total of 6,500ha of plantation land. MARC foresees the plantation division, which is expected to generate positive cash flow from 2012 onwards, continuing to absorb free cash flow for capital expenditure. In addition, the group has also invested a total of RM13 million, with another RM16 million budgeted, for rubber powder and rubber sheet production from used rubber types. The plants, located in Kuching and Kota Kinabalu, are expected to begin operations by the first and second quarter of fiscal year 2010 respectively. MARC notes that several of these businesses are in the gestation period, and as such, are likely to place additional demands on the group’s cash flow in the near term. 

The group’s diversification strategy has been yielding positive results. In FY2009, Weida’s revenue grew 35% to RM267.8 million (FY2008: RM198.9 million), and its pre-tax profit increased by 33% to RM26.6 million (FY2008: RM20.0 million) with the benefit of the maiden contribution from its Syrian project and rentals from telecommunication towers. For the 6-month period ended June 30, 2009 (1HFY2010), Weida’s performance remained strong with revenue growing 45% to RM153.5 million (1HFY2009: RM106.0 million) and pre-tax profit increasing sharply by 74% to RM14.8 million (1HFY2009: RM8.5 million).

In recent periods, Weida has exhibited uneven cash flow generation, reporting net cash flow from operations (CFO) of positive RM112 million for the 12-month period ended March 31, 2009 and negative RM4.1 million for the subsequent 6-month period ended September 30, 2009. Much of the variation in CFO has been on account of its working capital requirements for its telecommunication tower business. More recently, the group’s leverage position has improved to 0.77 times as of end-September 2009 (FY2008: 1.03 times) as proceeds from the sale of the telecommunication tower contract receivables to a special-purpose vehicle with an asset-backed funding facility was used to repay RM24.9 million in borrowings. MARC’s expectations are that the gearing levels will rise to fund its recent expansions, although this is expected to remain at acceptable levels commensurating with its current rating levels.

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