MARC has affirmed its MARC-2ID/AID ratings on Goodway Integrated Industries Berhad’s (Goodway) RM80 million Murabahah Notes Issuance Programme/Islamic Medium Term Notes Programme (MUNIF/IMTN). The outlook on the ratings is maintained at negative. The affirmed ratings take into consideration Goodway’s competitive position as a major domestic producer of rubber compounds and leading provider of retreading services and its stable and profitable rubber compound business. The affirmed ratings also incorporate the recent improvement in Goodway’s profitability after a period of weak operating performance, during which the group had breached its gearing covenant. Goodway later rectified its breach by restoring its debt-to-equity ratio to 1.65 times as at June 30, 2009, against the covenanted 1.75 times. As of end 3QFY2009, Goodway’s debt-to-equity ratio has further improved to 1.63 times. The negative outlook recognises the limited gearing covenant headroom that is afforded by its current credit profile and incorporates MARC’s concern that ongoing profitability pressures could persist despite a more stable macro environment in 2010. Additionally, MARC is of the view that the group’s continued heavy reliance on short-term borrowings to finance its working capital requirements places it at increased risk of covenant breach. Rating stability will depend on Goodway’s ability to improve its financial performance to pre-2008 levels and to meaningfully reduce its debt.  

Goodway’s well established rubber compound segment remains its core business activity, contributing 52% to group revenue in the first nine months of fiscal 2009, although contribution from the group’s retreading service division has steadily increased. The group, whose domestic retreading business consumes about one-third of its internal rubber compound production, is now expanding to China and Indonesia markets via joint-ventures to increase its overseas retreading sales, which currently constitute 34% of total retreading sales. Given the low ratio of new to retread tyres in China and Indonesia, these markets offer significant growth potential for the group.

MARC notes that Goodway’s financial performance for the first nine months of financial year ending December 2009 (9MFY2009) reveals improving prospects in its rubber compound and retread segments  following a dismal fiscal 2008 when it reported a loss of RM12.6 million on the back of a sharp fall in sales volume in the fourth quarter of the financial year ended December 31, 2008, compounded by a surge in raw material prices and one-off impairment charges and foreign exchange losses of RM8.0 million incurred by its rubber trading division. During the commodity price run-up in 2008, the high price of natural rubber, a major raw material in the manufacture of rubber compounds, accounting for 60% to 70% of its total operating costs, led to a decline in Goodway’s gross profit margins to 9.9% in FY2008 (FY2007: 15.9%).

The uptick in sales is evident in the quarter-on-quarter increase in revenue to RM53.6 million in 3QFY2009 from RM45.8 million in 2QFY2009 and RM38.4 million in 1QFY2009 with pre-tax profit for 9MFY2009 increased to RM2.9 million (9MFY2008: 0.97 million). Cost containment measures such as review of non-core operating assets with a view of disposal and scaling down and tighter working capital management has enabled Goodway to return to positive operating profit margin, recording a margin of 6.0% for the 9-months of FY2009 (FY2008: -1.77%). Similarly, cash flow from operations also improved to RM12.1 million (FY2008: RM10.6 million) with CFO interest coverage increasing to 2.30 times (FY2008: 1.31 times).

Contacts: 
Francis Xaviour Joe 03-2090 2279/ fxjoe@marc.com.my;
Jason Kok 03-2090 2258/ jason@marc.com.my ;