MARC has downgraded the long-term rating of Goodway Integrated Industries Berhad’s (Goodway) RM80 million Partially Underwritten Murabahah Notes Issuance Facility / Islamic Medium Term Notes Programme, from a rating of A+ID to AID. The short term rating however is reaffirmed at Marc-2ID. The downgrade reflects the risks associated with the company’s proposed venture into the manufacture of Off-the-Road retreads (OTR), a weaker financial profile arising from lower operating margins due to rising raw material prices especially natural and synthetic rubber and a higher leverage level due to higher consolidated debt from recent acquisitions. Mitigating factors are Goodway’s continued position as the leading domestic manufacturer and distributor of hot and cold-cure process rubber and retread related products with an approximate 30% market share and its recent acquisition of Big Wheel Holdings Sdn Bhd (BW), has expanded its tyre retreading operations to East Malaysia.

Retread tyres are popular amongst commercial and industrial vehicles as it is priced relatively cheaper than new tyres without compromising on quality and performance. More than 60%  of Goodway’s precured tread liners are exported overseas. Goodway’s manufacturing operations are located in Nilai, Seremban from which it supplies an impressive range of tyre retread materials and high quality technical rubber compounds to leading retreading operators, new tyre manufacturers and international companies dealing in various rubber related products, both domestically and for the export market. Besides manufacturing rubber compound products, the Group also provides tyre retreading services, managed through its wholly-owned subsidiary, Kilotrac Industries Sdn Bhd (Kilotrac) also housed in Nilai and through its recent acquisition of the BW Group in Sabah. The range of rubber compounds that are manufactured and distributed by the Group include Master Batch (M.B.), retread compounds, technical compounds, camelback, orbi tread, precured tread liners, cushion gums, sidewall veneers and gum chord.
 
To further develop its retread business and to develop a niche for its rubber compound products the company together with its Indonesian joint venture partner PT OTR Technology Internasional, is in the final stages of setting up the plants after completing the development of new processes and rubber compounds that are suited for heavy duty vehicles. This compound will be used for OTR retreads for heavy duty vehicles such as tractors and earth works vehicles. The development of this new product formulation for OTR retreads is expected to drive sales growth going forward. The venture is however only expected to show results in the next fiscal year.

In terms of profitability, Goodway has recorded revenue CAGR of 14.36% since 2001. Operating margins have been averaging at approximately 10% until FY2005 when they fell below 6% attributable to a write off of bad debts amounting RM4.5 million in both Goodway and Goodway Rubber Company Pty Ltd, resulting from the liquidation of a major customer, Tyre Distribution Pte Ltd in Australia. Higher raw material prices such as natural rubber have also adversely affected the groups operating margins although the company has been able to progressively pass on the increases in costs.

With regard to the group’s debt profile, its leverage ratio spiralled to 1.46 times in FY2005 (cap 1.5 times) from long-term debt obligations that were assumed pursuant to the acquisition of the Big Wheel group of companies and from the bond issuance. The company plans to inject capital via a private placement which when completed will alleviate the situation and bring the cap down to a more manageable level.  This private placement of up to 10% of the paid up share capital of the company has received Securities Commission approval and is expected to be completed by 4 November 2006. 

As at end-December 2005, Goodway had available cash and cash equivalents of RM5.34 million and unutilized banking lines of approximately RM43.4 million. However, the group’s current leverage ratios when viewed against its covenanted debt to equity cap will considerably reduce any flexibility that the unutilized banking lines provide.