MARC has affirmed its ratings on Goodway Integrated Industries Bhd’s (Goodway) RM80.0 million Murabahah Notes Issuance Facility/Islamic Medium Term Notes (MUNIF/IMTN) at MARC-2ID/AID. The rating outlook has been revised to stable from negative. The outlook revision takes into consideration the group’s demonstrated efforts to reduce its gearing levels to below the covenanted level of 1.75 times, as well as an improvement in its financial performance, which MARC expects the group to sustain as recovery in the regional economy takes hold. The ratings continue to be supported by Goodway’s sustainable position as a major domestic rubber compound manufacturer and retreading service provider with a significant distribution network in the region. Notwithstanding these factors, the group’s ratings are constrained by its remaining sizeable debt, a major portion of which are short term, and raw material price volatility that may impact Goodway’s working capital requirements.

Goodway’s principal activities are manufacturing rubber compounds for retreading tyres and providing retreading services. With operations based in Shah Alam, Selangor; Nilai, Negeri Sembilan and Kota Kinabalu, Sabah, the group has been able to sustain its position as a major rubber compound manufacturer and retreading service provider in Malaysia, with distribution warehouses in Australia, Sweden and Indonesia. Since MARC’s last review, Goodway’s venture into China to manufacture pre-cured tread liners has yet to yield significant results. Operations are expected to commence only in the third quarter of 2010 due to delays arising from a plant relocation exercise from its previous location in Jiangsu Province, China to a larger facility in Nantong.

Despite set-backs of its China operations, where it has invested RM5 million to date, there has been some encouraging signs of improvement in profitability levels since FY2009. For the first half of fiscal 2010 (1HFY2010), Goodway recorded a pre-tax profit of RM3.4 million, up from RM0.9 million in the previous year’s corresponding period, attributed to a recovery in demand for the group’s retreading services. Goodway has also scaled down in loss-making trading segment which was previously a drag on its profitability. Revenue in 1HFY2010 was also higher at RM118.3 million (1HFY2009: RM84.2 million) due to higher commodity prices, with Standard Malaysian Rubber 20, a major cost component, averaging RM9.95/kg during the period, compared to RM5.33/kg in the corresponding period in 2009. Although the group’s operating margin in 1HFY2010 has marginally declined to 5.46% (1HFY2009: 5.71%), the profits, combined with the group’s fundraising exercise on April 23, 2010, have reduced the group’s gearing level to 1.39 times from 1.62 times as at end-FY2009. Goodway had raised an additional RM4.4 million through a private placement of shares, nearly restoring its shareholders’ funds to pre-economic crisis levels in 2007. The proceeds from the fundraising exercise have somewhat eased Goodway’s reliance on short-term debt to fund its working capital requirements.

Goodway has RM60 million outstanding under the MUNIF/IMTN programme and a scheduled RM10 million reduction in facility utilisation in August 2011. MARC believes that Goodway should generate sufficient cash flow from operations to service its near-term debt obligations. However, MARC sees moderate refinancing risk with the lumpy final repayment of RM50 million due in August 2012. Goodway’s liquidity position is supported by cash and bank balances of around RM11.3 million as at end-1HFY2010.

The stable outlook reflects the easing downward pressure on Goodway’s ratings due to steps taken by management to improve profitability levels and the use of free cash flow to deleverage. The rating outlook assumes continued improvements in Goodway’s operating performance and financial leverage. The ratings could be pressured if a reversal of the improved operating trends seen in 1HFY2010 occurs and results in increased concern regarding Goodway’s refinancing risk with respect to the final redemption of the notes in 2012.

Contacts: 
Rajan Paramesran 03-2082 2233/ rajan@marc.com.my;
Ahmad Gazzara Czillich 03-2082 2259/ gazzara@marc.com.my;
Jason Kok 03-2082 2258/ jason@marc.com.my.