KUALA LUMPUR: Goodway Integrated Industries Bhd, which fell into the red in its first financial quarter ended March 31, 2014 (1QFY14), is confident of remaining profitable this year as sales of its retread products are expected to pick up again in the second half, said its chief executive officer Tai Boon Wee.
The declining prices of Malaysian rubber also bode well for the group’s profitability.
“When we were first listed [in 2004], the natural rubber price was RM4 per kg. Last year, the price went up to as high as RM17 per kg. Fortunately, it has dropped to about RM5.30 to RM5.70 since then,” he said in an interview with The Edge Financial Daily.
The country’s largest manufacturer of rubber compounds and retread tyres posted a net loss of RM11,000 in 1QFY14, compared to a net profit of RM1.78 million a year ago, on lower revenue of RM58.23 million from RM73.2 million. Pre-tax margin for 1QFY14 stood at 9.99%, compared with 3.94% a year ago.
Tai attributed the net loss to the group’s huge debts due to past acquisitions of subsidiaries and land, as well as high working capital since it went for listing in 2004 due to escalating rubber prices.
As at March 31, 2014, Goodway’s total borrowings stood at RM138.65 million, or a net gearing level of 1.3 times.
Tai said the group is banking on the developed nations’ growing emphasis on environmental protection to boost its rubber compounding business, which remains its biggest revenue contributor.
For the financial year ended Dec 31, 2013 (FY13), rubber compounding business contributed 72% to Goodway’s total revenue.
Tai said rubber compounding is considered a “green” industry in developed countries. This bodes well for Goodway, which exports its products to up to 60 countries worldwide spanning Asia, Europe and the Americas.
“For every one new tyre on the US road, there are 1.25 retread tyres used. Over time, it should not be a surprise that the number of retread tyres will be more than that,” he said.
“At the same time, there are some European countries that have imposed a law for new tyre manufacturers to produce tyres that can be retreaded. Otherwise, they are disallowed from producing tyres,” he added.
Retread is a re-manufacturing process that replaces the tread on worn tyres, extending the life of a worn tyre. Retread tyres are also less expensive than new tyres.
Goodway produces rubber compounds as semi-finished goods for tyre makers, but most of its income is derived from its own retread tyre business. Tai explained that the bulk of its tyre application compound is distributed to companies processing retread tyres.
“We produce high quality compounds. Currently, we are a certified global supplier for Continental tyres. We are also the track compound maker for Goodyear in Asia,” he added.
Goodway also makes rubber compounds for technical application, where the company sells them to hydraulic hose producers. Some contraptions that need these compounds include seismic bearings and bridge bearings.
While the outlook for the rubber compounding industry looks rosy, Goodway’s historical earnings do not look as palatable owing to thin margins. For FY13, the group made a net profit of RM5.77 million on revenue of RM265.77 million, indicating a net margin of 2.17% and a pre-tax margin of 2.58%.
This compared with FY12’s net profit of RM5.29 million and revenue of RM285.07 million. Net margin and pre-tax margin stood at 1.86% and 3.14% respectively in FY12.
To improve margins, Tai said Goodway is working on improving its efficiency.
On Goodway’s high debt, Tai said the group had received shareholders’ approval at its extraordinary general meeting on June 18 to develop a portion of its 15.56-acre (6.3-hectare) piece of land in Kota Kinabalu, Sabah, into an industrial development with a gross development value of RM183.43 million.
The group expects to reap a profit of RM33.85 million from the proposed project, for which construction will begin in August this year, to be completed in 36 months. Revenue from the project will be recognised from the later part of FY17.
“The market in Sabah lacks this type of industrial properties; we will build a three-in-one type of concept comprising a showroom, office and warehouse. The project is also only 7.8km away from Kota Kinabalu city,” said Tai.
Nevertheless, Goodway has no intention of diversifying into the property development segment, said Tai, adding that the Kota Kinabalu development will be a once-off project to help pare down its debts, and hopefully lower its interest expense.
Goodway stock has been on an uptrend over the past year, rising from the 35-sen level to close down 1 sen or 2.13% at 46 sen last Friday, giving a market capitalisation of RM52.5 million.
This article first appeared in The Edge Financial Daily, on June 30, 2014.