Maxtral Industry Bhd - 2010

MARC has placed Maxtral Industry Berhad's (Maxtral) following Islamic debt ratings on MARCWatch Negative:

1) The AID rating on its RM80.0 million Al-Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) facility; and
2) The MARC-2ID/AID ratings on its RM20.0 million Murabahah Underwritten Notes Issuance/Murabahah Medium Term Notes (MUNIF/MMTN) facilities.

The rating action reflects a slower-than-expected build-up of liquidity ahead of a RM20.0 million BaIDS principal repayment due in April 2011 following a weaker operating performance in the first nine months of the financial year ended December 31, 2010 (9MFY2010) amidst particularly challenging market conditions. The MARCWatch also incorporates some degree of uncertainty with regards to the timber and wood product-based group's ability to secure its upcoming debt maturities through refinancing and/or asset disposal.

MARC's previous negative outlook on Maxtral's rating had incorporated the anticipation of dwindling log supplies and increased earnings uncertainty. However, Maxtral's results for 9MFY2010 were weaker than expected as a result of lower demand for timber and timber products and unfavourable foreign exchange rate movements. Revenue for the period fell to RM53.8 million from RM165.3 million compared to the previous year’s corresponding nine-month period. The group reported a RM7.7 million pre-tax loss for 9MFY2010 compared to a pre-tax profit of RM8.4 million for the corresponding period a year ago. Net cash generated from operations for 9MFY2010 was RM4.8 million, down from RM22.5 million for 9MFY2009.

MARC views the timing for a significant improvement in Maxtral's timber and timber products business performance as uncertain and believes that the softer demand conditions are likely to persist in the near term. At this juncture, MARC believes that Maxtral's capacity to meet its upcoming BaIDS repayment is dependent on asset disposals, refinancing or the issuance of new equity.

Maxtral plans to generate additional liquidity to meet its immediate BaIDS obligations through the disposal of land holdings which have a total market value of RM55.0 million. However, the exact timing for completion of the transaction currently remains uncertain and is subject to significant execution risk given the rather compressed timeframe for the completion of the transaction. Notwithstanding, Maxtral's track record of timely debt servicing to date has notably benefited from its shareholders’ commitment to the organisation, as evidenced by the RM3.9 million shareholders’ advance this year to cover the deficiency in its cash flow for debt service.

On resolution of the MARCWatch, the ratings could be lowered if Maxtral is unable to secure additional external liquidity by way of asset disposal(s), new capital or borrowings in the next several weeks to address its minimum required sinking fund account balance of RM10.0 million by January 2011. This represents half of the upcoming RM20.0 million principal repayment due in April 2011.

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