GOODWAY INTEGRATED INDUSTRIES BHD (GIIB) will focus more on the higher margin, technical application segment of its rubber compounding business to enhance earnings. This will be by way of producing more bush bearings, hydraulic hoses and other such items next year, after having neglected the segment for many years.
In an interview with The Edge, CEO Tai Boon Wee says technical application segment products bring higher margins than the tyre application segment, which produces rubber compounds for the tyre manufacturing industry.
He says good results can immediately be seen coming from the technical application segment next year. At the moment, the segment makes up only 20% of sales of the rubber compounding business, says Tai, who owns a 16.52% stake in GIIB.
The whole of the rubber compounding segment contributed about 82% to GIIB’s revenue of some RM109.2 million for the first six months of the year. The company’s other business, tyre retreading, contributes to the remaining 18% of revenue.
“This (technical application) is one part of the business that we have neglected for more than 10 years as we became so engrossed in the tyre application business. But now we have assembled the right people to expand the technical application segment,” says Tai.
In the meantime, GIIB is also expanding its tyre retreading business, and will be increasing the production capacity of its tyre retreading plant in Nilai to 15,000 tyres per month from the current 8,000.
According to Tai, GIIB has received a firm inquiry from an Australian entity to produce 7,000 retreaded tyres per month. Besides the Nilai facility, GIIB produces 20,000 retreaded tyres per month at its plant in Kota Kinabalu.
GIIB is the largest producer of retreaded tyres in Sabah and commands a 75% market share there, says Tai. The group, which produces 2,000 tonnes of compounded rubber per month, prides itself as a premium rubber compounder.
“We are in the premium segment of the market, and in general our prices are about 10% to 20% higher than the market. We have been the largest player in the domestic rubber compounding industry for the last 20 years. Our nearest rival can only produce about 1,000 tonnes per month,” says Tai.
However, the slowing global economy and declining demand for rubber products from China have put pressure on GIIB. While its raw material cost is also lower due to the low natural rubber prices, its top line has been affected by the slump in demand from China.
For 6MFY14, GIIB’s revenue dropped 24% to RM109.15 million, compared with the same period last year. As a result, its net profit slumped to RM984,000 from RM3.77 million. At its closing price of 48 sen last Thursday, the company had a market capitalisation of RM53 million.
“Of course we are affected in terms of overall volume and revenue, but we have a good customer base that is not affected by this market sentiment. However, our outlook for next year is going to be flat. We don’t expect to have big growth next year,” says Tai.
Nevertheless, the redevelopment of its land in Kota Kinabalu into warehouses, industrial showrooms and offices with a gross development value (GDV) of RM183.43 million could provide a cushion for GIIB’s earnings within the next two to three years.
GIIB expects the redevelopment to provide a gross development profit of RM33.9 million, which will be spread out over the construction period of about 36 months, according to the group’s circular on the diversification into property development that was announced in May.
The group’s property assets in Kota Kinabalu have leasehold land status, but that is as good as freehold because of the long tenure of 999 years. GIIB obtained the land and the property on it after it acquired Big Wheel Holdings Sdn Bhd for RM24.6 million in 2005.
Although the group has embarked on its maiden development project, Tai says that currently, there is no plan to turn GIIB into a property development company.
“We only make use of the land that we have to unlock the land value — that is the only intention we have. We will see how it goes, and with this project, we’ll see whether we have any other opportunity in this direction.
“The parcel of land that we are sitting on is just 7.5 miles from the city, along the main highway. So, we have to do something about it, otherwise we are sitting on such a valuable asset just producing tyres,” says Tai.
However, shareholders should not expect the profits from the development project to translate into higher dividends. This is because the earnings will be used to pare down GIIB’s borrowings, which stood at RM123 million as at June 30, 2014, Tai says.
The borrowings work out to a gearing of over one time GIIB’s total equity of RM93.4 million as at June 30, 2014, while cash and cash equivalents stood at RM21.15 million. The borrowings will also be pared down via cash generated from operations, says Tai.
“We expect our gearing ratio to come down to below 0.8 times, and subsequently our target is to bring it further down to 0.5 times. Once we are able to realise the proceeds from the property development project, we can pare down substantial portion of the borrowings,” he says.
Launch of GST and accounting software next month
GIIB is also among the first batch of six vendors approved by the Royal Malaysian Customs to provide Goods and Services Tax software. It is partnering an Indian IT company, ND Microsystems Pvt Ltd, to provide the software, says Tai.
It will launch the GST software — which will incorporate basic accounting functions as well to make it more marketable — next month, and is targeting manufacturing companies, he says.
“This software is basically for the manufacturing sector, where it incorporates [the processes] from the time you place an order, to the type of materials you have to purchase, when you are going to produce, until invoicing and collection.”
While he does not expect the contribution from the GST and accounting software business to have a big impact on earnings next year, the venture will pave the way into the sector for the group, he says.
This article first appeared in The Edge Malaysia Weekly, on December 1 - 7, 2014.