MARC has affirmed the long and short-term ratings of Goodway Integrated Industries Berhad’s (Goodway) RM80 million Partially Underwritten Murabahah Notes Issuance Facility/ Islamic Medium-Term Notes Programme, at AID/Marc-2ID. The factors supporting the ratings affirmation include its improving profitability, the company’s market position as one of the leading domestic manufacturers and distributors of hot and cold-cure processed rubber and retread related products with an approximate 30% market share, its strong distribution network, good geographic diversity with export sales contributing 55% of total revenue, and its recognised brand name. However, the ratings remain constrained by Goodway’s substantial leverage (which is a result of its recent acquisition orientation and rising working capital requirements), its negative free-cash flow for the past three years, and exposure to a competitive pricing environment and volatile raw material costs. The ratings carry a Stable Outlook. 

Goodway has demonstrated a fair operating performance in recent years. With reported revenues of RM157.2 million in FY2006, Goodway is larger than many of the players in the highly competitive rubber compounding sector. Additionally, Goodway’s global operations offer growth opportunities in rapidly growing economies such as China. Goodway has not historically hedged its exposure to raw material price movements but has been able to pass through rubber cost increases, although there is often a delay between the time the group incurs the increased rubber price and the time that it is able to pass the increase on to its customers. A continuing rise in natural rubber prices typically results in margin volatility and lower profitability. Overall stable rubber prices for the year to date and good demand for Goodway’s products have enabled the group to substantially pass through raw material cost increases.

For FY2006, Goodway’s operating EBITDA was RM11.5 million as compared to RM6.7 million in FY2005. The increase in EBITDA was primarily due to better gross margins on the back of higher revenue. This was also the result of better control of production costs and contribution from Big Wheel Holdings Sdn Bhd (BW), which principally undertakes the retreading of passenger car and truck tyres, acquired in FY2006. For FY2006, BW registered a net profit of RM3.5 million. OPBIT margins have also improved slightly to 7.31% in FY2006 from 5.90% in FY2005, but remain in the single digit range. Goodway‘s leverage is expected to trend upwards in FY2007 following the acquisition of the tyre retreading assets of Autoways (Malaya) Sdn Bhd.  Total debt is expected to reach RM110.4 million which will translate into a debt to equity ratio of 1.56 times, unless offset by capital infusion. Although the debt leverage cap has been raised to 1.75 times compared to 1.50 times previously. MARC takes the position that this situation is tolerable at current rating levels as long as liquidity and free cash flow generation remains adequate given that Goodway does not have any significant debt maturities until 2009. MARC expects future material acquisitions to be funded by issuance of new equity to avoid any material adverse effect on the group’s debt measures.

The stable rating outlook is based on MARC’s expectation that the recent improving trends in operating performance will be sustained, and that the conservation of earnings and cash flow will be a strategic priority over the near to intermediate term.