Weida (M) Bhd - 2010

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 (MUNIF/IMTN) with a stable outlook. The affirmed ratings reflect its leading domestic market position in polyethylene engineering products, strong niche positions in water, wastewater and telecommunication infrastructure in East Malaysia and moderate balance sheet leverage. At the same time, the ratings take into account predictable earnings and cash flows derived from its telecommunication tower operations and its operation and maintenance of the septic sludge treatment plant contract which runs through 2027. The ratings also incorporate its relatively high capital investment needs for its oil palm plantation operations which could require incremental borrowings and/or consume the majority of its internally generated cash flow, as well as the materially higher business and financial risks entailed by Weida’s businesses abroad.

The stable rating outlook reflects MARC’s anticipation that Weida’s financial performance and capital structure will remain commensurate with the ratings over the next several quarters.
 
While maintaining its position as one of the largest domestic producers of polyethylene engineering products, Sarawak-based Weida has steadily diversified into the construction of water, wastewater and telecommunication infrastructure. During the past two years, the contribution from its manufacturing division as a proportion of total group revenue has decreased with the increased earnings contributed by other business segments. Weida receives recurring rental income from building and leasing telco towers to the three largest local telco players. Weida has built a total of 240 towers under the Malaysian Communications and Multimedia Commissions’ Time 2 Programme. The group also derives recurring income from the management, operations and maintenance of the Matang Septic Sludge Treatment Plant in Kuching.

Weida has also ventured abroad; it secured a EU R60.0 million turnkey contract for the construction of water and sewerage treatment plants in the Syrian Arab Republic (Syria) and commissioned a HDPE manufacturing plant in the Philippines. The overseas turnkey project has generated a modest net profit of RM10.30 million for Weida to date, as of June 30, 2010.  As of June 30, 2010, the project has achieved 66% completion rate and is slated for completion by end-2011.

Weida’s Philippines HDPE manufacturing operations have yet to turn in a profit since the commissioning of the plant in January 2009. It incurred a pre-tax loss of RM0.35 million in 1QFY2011. The group has invested RM12 million in the business as of end-September 2010, and has not budgeted for further capital investment for the next two years. With the current low utilisation rate, Weida’s FY2012 target to break even appears optimistic.

In addition to the uncertain gestation period of the Philippines operations, the capital investment needs of the group’s plantation division could also exert pressure on the company’s cash flow over the next several years. To date, 4,000 hectares of its 6,500 hectares of plantation land in Sarawak have been cleared and planted, with its first harvest expected in mid-2011. The group has budgeted further investments of RM29 million and RM21 million in FY2011 and FY2012 respectively.

For the 12 months ended March 31, 2010 (FY2010), Weida recorded a higher consolidated pre-tax profit RM28 million (FY2009: RM26.6 million) on the back of marginal increase in revenue (FY2010: RM276.2 million, FY2009: RM267.8 million). Weida’s manufacturing segment posted better year-on-year results, which compensated for the lower year-on-year profits of its works segment. The group maintained its positive earnings momentum for the three months ended June 30, 2010 (1QFY2011). It reported higher revenue and pre-tax profit of RM70.8 million and RM9.0 million respectively in the first quarter of FY2011 (1QFY2010: RM50.1 million and RM6.5 million respectively).

MARC does not expect significant reduction in the group’s gearing position in the near term as its existing borrowings are needed to support the working capital requirements of its ongoing operations. Weida’s gearing, measured as debt to equity, rose marginally to 0.57 times as of June 30, 2010 from 0.50 times as of end-March 31, 2010, due to additional drawdown of borrowings to support its capital spending.

The group generated positive cash flow from operations (CFO) of RM10.3 million during 1QFY2011 while free cash flow generation was lower at RM4.7 million. MARC does not expect the group’s free cash flow levels to remain constrained in the near-to immediate-term by capital investment requirements of its plantation division as well as its other new businesses. Weida’s liquidity is adequate; as of June 30, 2010, its unrestricted cash and cash equivalents stood at RM40.4 million against short-term debt of RM48.8 million. There are no near-term scheduled maturities in respect of the RM35.0 million outstanding notes issued under the MUNIF as of October 31, 2010. The facility expires in August 2012.

Major Rating Factors

Strengths

Challenges/Risks

• Capital expenditures on oil palm plantation not expected to generate revenue until fiscal year 2012.