MARC has reaffirmed, with Positive Outlook, the ratings of A+ID/MARC-1ID on KNM Group Bhd’s (KNM) RM150.0 million Murabahah Underwritten Notes Issuance Facility / Islamic Medium Term Notes (MUNIF/IMTN). The ratings are premised upon KNM’s strong competitive position as one of the largest manufacturer of process equipment in the region; growing international exposure, access to high technical expertise and ability to offer a wider range of products through the acquisitions of overseas companies; strong order book; strong track record; and improving financial profile. These positives are however moderated by the pace of acquisition trails that may increase the group’s operating risk profile.

KNM is an investment holding company with subsidiaries principally involved in the manufacture of a diverse range of process equipment used in the oil, gas, petrochemical and minerals industries. Since its listing on Bursa Malaysia in 2003, KNM has steadily moved into the high-end segment of the process equipment market and expanded its reach to the booming minerals industry.

Through expansion and strategic acquisitions, the group continues to strengthen its position overseas; with presence in the Oceania, Asia, North and South America, Europe and African regions. Export revenue has notably increased from 61.0% in FY2003 to 95.0% in FY2005. Its strong customer base, comprising established oil majors and reputable oil and gas companies, minimizes credit risk.

The group’s current order book stood at more than RM727.7 million as at February 2006 whilst its tender book size amounted to nearly RM6.0 billion. The acquisitions of FBM-Hudson Italiana SpA (FBM) and Hudson Products Pacific Pty Ltd (Australia) (HPP) are expected to benefit KNM through increased competitive position as it is able to offer a larger range of products and enlarge its network of customers through an increased international presence when tendering for jobs. Future earnings growth will be driven by the additional capacity from the expansion at the China plant coupled with the additional capacities in Europe (FBM) and Australia (HPP). By 2007, the group expects to have an enlarged production capacity of nearly 100,000 metric tonnes (MT) per annum vis-à-vis its current capacity of 46,500 MT per annum.

As a contract manufacturer, KNM hedges its raw material costs and foreign exchange exposure to protect its profit margins.

For the financial year ended December 2005, KNM recorded significant growth in its revenue and pre-tax profit to RM343.9 million and RM53.1 million respectively; aided by strong demand for process equipment on the back of rising oil prices as well as contributions from the Alcan Gove project in Australia. Operating profit margin was robust and in double digits; comparable to similar rated peers in the industry.

Debt leverage level stood at less than 1.0 time based on FY2005’s results; complying with the covenant of 1.5 times under the issue structure. The FSCR of 1.8 times as at the same date was also consistent with the FSCR covenant of at least 1.5 times to be maintained throughout the tenure of the facility.