The short term rating for KNM Group Berhad’s (KNM) RM150 Million Murabahah Underwritten Notes Issuance Facility (MUNIF)/ Islamic Medium Term Notes (IMTN) has been upgraded to MARC-1ID whilst its long term rating has been affirmed at A+ID. The ratings reflect the group’s increasing order book underpinned by strong demand for process equipment in the oil and gas industry; the group’s expansion capacity to accomodate the rising demand; its venture into Dubai which paves the way for the group to tap the Middle Eastern market and its increasing presence in the international market. The ratings are moderated by the group’s high working capital requirements due to the nature of its projects.

KNM is an investment holding company with subsidiaries principally involved in the design, manufacture and fabrication of a diverse range of equipments used in the oil, gas, petrochemical and minerals industries for both the local and overseas markets. The group’s established track record in the industry is evident from the RM423.0 million worth of contracts in hand from reputable clients such as PETRONAS, Shell, ExxonMobil, Fluor Canada, Technip and Alcan Gove; also mitigating credit risk.

KNM recorded pre-tax profit of RM12.9 million on the back of RM172.1 million revenue in FY2004, the bulk of which was contributed by the local plants. Exports accounted for nearly 74% of total
revenue. By 2006, the group intends to increase its production capacity by 18,000 tonnes to 58,500 tonnes p.a.; about 80% (15,000 tonnes) of which will be at its overseas operations in China, Dubai and Indonesia. With the potential projects supported by its expansion over the next 18 months, revenue growth for the next three fiscal years is expected to be robust; with the export markets continuing to be the major revenue contributor, moving forward.

Typical of companies which are on a high growth track, KNM required higher financing for some of its bigger projects with longer milestone payments and working capital. In FY2004, KNM’s debt leverage position rose to more than 1.0 time but still within the covenanted level of 1.5 times. Based on unaudited half year results as at June 2005, debt leverage level was lower at 1.0x. Going forward, debt leverage is expected to gradually decline, in line with the reduction schedule under the facility and the accumulation of retained earnings.

KNM’s base case cashflow measures appear robust but sensitivity analyses reveals that the cashflow is vulnerable to delays in collections from clients. Liquidity risk, nevertheless, is mitigated through the maintenance of a MUNIF minimum required amount and the progressive build up of the primary and secondary IMTN prior to each redemption.