MARC AFFIRMS WEIDA (M) BHD’S MUNIF/IMTN RATINGS AT MARC-1ID / A+ID

Dec 9, 2011 -

MARC has affirmed its ratings of MARC-1ID/A+ID on Weida (M) Bhd’s (Weida) RM100 million 7-year Murabahah Underwritten Notes Issuance (MUNIF)/Islamic Medium Term Notes Facility (IMTN). The outlook on the ratings is stable.

The rating action incorporates the partially funded designated account that Weida has recently set up to improve the certainty of full and timely repayment of its remaining outstanding notes of RM25 million. The designated account is initially funded at RM10 million; Weida will make three equal monthly payments of RM5 million each from January to March 2012 to ensure the account is fully funded with cash prior to the notes’ April 5, 2012 redemption date. MARC considers the level of credit support provided by the cash funded debt service account to be sufficient to affirm Weida’s issue ratings notwithstanding the increase in the company’s overall credit risk profile due to the pressure exerted by growth-related capital spending on the financial metrics of the group and holding company.

Weida’s near-term credit profile is also constrained by its increased sovereign risk exposure in respect of its water and wastewater treatment project in the Syrian Arab Republic. Earnings generation from Weida’s strategic initiatives has lagged capital spending and MARC does not expect any major improvement in Weida’s free cash flow generation prior to its April 2012 notes maturity on account of its significant planned capital spending for its plantation division in the months ahead.

Sarawak-based Weida has a long track record as a major domestic manufacturer of high-density polyethylene (HDPE) products but has diversified into construction of water and telecommunication infrastructure and, recently, oil palm cultivation. Weida’s HDPE business has continuously benefited from government-funded rural water infrastructure projects, particularly in its home market of East Malaysia. MARC recognises the challenges and execution risk associated with its strategy to penetrate the more fragmented West Malaysia market.

MARC believes that Weida’s diversification into oil palm plantation has had the most significant impact on its credit profile. The rating agency notes that to date, Weida has spent over RM60 million of plantation development expenditure on its 6,500 ha palm oil estate in Bintulu, Sarawak and plans to incur another RM21 million of planting expenditure in FY2012. The plantation operations are only expected to start contributing positively to the group’s earnings after the expiry of its rated facility in FY2012.

Weida’s works division overtook its manufacturing division as the largest revenue and earnings contributor in its financial results for the 12 months to March 31, 2011 (FY2011). Following the completion of its construction works for 244 telco towers in Sabah under Malaysian Commission and Multimedia Communication’s (MCMC) Time-2 programme, a key driver of the division’s earnings has been construction contracts awarded under the Time-3 programme. The 244 completed telco towers under MCMC’s Time-2 programme currently generate a recurring rental income of about RM9.60 million per annum. From September 2010 through July 2011, Weida has secured RM68 million worth of contracts to construct a total of 88 towers under the Time-3 programme. Unlike the telco towers constructed under the Time-2 programme, there are no recurring monthly lease payments due from the telcos under the Time-3 programme, only construction receivables due from MCMC upon the completion of the towers. The rating agency notes the pressure on Weida’s working capital exerted by the uneven order flow and absence of milestone billing but takes comfort from its successful procurement of term financing to fund its telco tower construction activities.

The escalating Syrian Arab Republic conflict has increased non-completion risk with respect to Weida’s outstanding works on a €60 million turnkey contract from the Syrian government for the construction of water and sewerage treatment plants in the country. To date, about 94%, or €47.7 million, of the €50.5 million worth of work orders has been completed. The project contributed RM34 million to the company’s revenue and RM3.0 million in pre-tax profits in FY2011. MARC understands that the company is seeking to withdraw from the turnkey contract upon completion of the current work orders. While progress payments for the project have been prompt, the current unrest in Syria could place progress claims retained by the Syrian government of €3.8 million at an increased risk of write-off or impairment. Of the aforementioned €3.8 million, Weida expects the Syrian government to release €2.9 million in 2012 and the balance in 2013. MARC notes Weida has not made any provisions with respect to its Syrian project receivables, and believes that any subsequent provisions to be made could impact its near-term bottom-line profitability.

In FY2011, Weida’s consolidated revenue and pre-tax profit rose by 4.9% and 45.6% to RM285.9 million and RM34.5 million respectively. However, it recorded a cash flow from operations (CFO) deficit of RM7.8 million, and an even higher negative free cash flow of RM37.7 million as a result of its plantation division’s heavy capital expenditure. MARC notes a steady lengthening of its average debtors’ collection period post-FY2010 and additional debt that Weida has been incurring to fund its negative free cash flow. Additional debt taken to fund its business expansion and diversification programmes include draw downs from an existing RM51 million term loan for its plantation division and a new RM26.3 million term loan for its telco tower construction division. MARC also observes a weakening of the holding company debt service coverage and financial leverage metrics, evidenced by its negative CFO of RM19.1 million and an increase in its debt to equity ratio to 0.88 times as at March 31, 2011 from 0.58 times a year ago.

The stable outlook on the rating is based upon the expectation that the debt service account will be fully funded by March 2012, making the ultimate source of repayment for the notes less dependent on refinancing events.

Contacts:
Taufiq Kamal, +603-2082 2251/ taufiq@marc.com.my ;
Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my .