MARC has downgraded the short term rating of M-Trex Corporation Sdn Bhd’s (MCSB) 7 year RM60 million Islamic Commercial Paper Programme (ICPs) from MARC-2ID to MARC-3ID with a negative outlook.  The downgrade is premised on risks associated with MCSB’s recent acquisition of M-Trex Carbon Sdn Bhd (MTC) and M-Trex Galvanised Steel Sdn Bhd (MGS) utilising the proceeds from the ICPs and where no due diligence was carried out prior to the acquisitions. Compounding the above are corporate governance issues, arising from MCSB’s breach of covenants under the Trust Deed/Facility Agreement relating to the acquisitions. Mitigating factors however are MCSB’s continued position as the leading local manufacturer of anodised aluminium panels for the mid to high end audio video equipment market and consistent revenues from its  automobile accessories distribution division. MCSB’s rating was put on MARCWatch with a Negative Outlook on 7 April 2006 arising from the non provision of relevant information for its annual surveillance review for 2005.

Incorporated as a private limited company under the name Wybro Corporation Sdn Bhd, the company changed its name to M-Trex Corporation Sdn Bhd on 18 May 2004. MCSB is an investment holding company with interests in the manufacturing and sale of anodised surface treated panels for the audio and video equipment and the trading of replacement and consumable parts for the automobile and semi conductor industries. The group’s manufacturing and trading activities are undertaken by its wholly-owned subsidiaries Jooei Industry (Malaysia) Sdn Bhd (JISB) and M-Trex Malaysia Sdn Bhd (MMSB) respectively.

For FY2005, MCSB registered a pre-tax profit of RM5.55 million on the back of a better performance from its manufacturing arm, JISB. MCSB reported a marginally lower OPBIT margin at 8.38% in FY2005 (FY2004: 9.28%).

The Group’s debt leverage ratio has risen to 1.47 times from 0.37 times in FY2004 primarily due to the RM60 million drawdown from the ICPs Programme but this is still below the debt leverage cap of 2.0 times imposed under the issue structure. MARC’s stress testing of the company’s cash flows reveals  that the Group’s DSCR would reach its minimum point of 1.0 times in FY2008 (when the first progressive redemption of the ICPs is due), with a 3% reduction in receipts. The cash flows will be able to take a 10% reduction in receipts if payments are also rolled over by 10%.

MARC will continue to monitor initiatives taken by MCSB to resolve its breaches of covenants and will advise any developments accordingly.