Emas Kiara Industries Berhad’s (EKIB) up to RM80 million Partially Underwritten Murabahah Notes Issuance Facility / Islamic Medium Term Notes Programme’s (MUNIF/IMTN) long term rating has been downgraded from A+ID (A Plus) to AID (A Flat) and short term rating reaffirmed at MARC-2ID. The ratings have been accorded a Stable Outlook. The downgrade follows from a dip in the company’s revenue from geosynthetics, a reflection of its dependence on the construction industry, lower profit margins due to higher raw material cost and a growing reliance on recurring income from lower margin industrial fabrics to cover fixed operating costs. Moderating factors include EKIB’s market leadership position in geosynthetics, diversification benefits from a wide product mix, rising export sales and potential improvements in efficiency and cost savings from the streamlining of its production facilities.

EKIB is the leading geosynthetic manufacturer and solution provider listed on the Second Board of Bursa Malaysia. It has a diverse product mix for a wide range of applications. It exports to the Asian region, Middle East, Australia and as far as Sudan in Africa, with total export sales accounting for 25% of revenue in 2005. Its integrated production facilities provide the Group with the flexibility to diversify into industrial fabrics where sales are more recurring in nature. The industrial fabrics contributed 19% to the Group revenue in 2005 as compared to a mere 1% in 2002.

The management has also embarked on a planned consolidation of its production facilities into two plants in Senawang and Rawang. The streamlining exercise will enhance production efficiency and cost savings which will translate into lower production costs.

EKIB’s revenue moderated by 7.2% due to lower geosynthetic sales in 2005. Both profits before tax and after tax shrank by 47.4% and 60.6% respectively, owing to lower operating margins caused by higher raw material costs. CFO interest coverage weakened significantly to 0.37x due to a sharp decline in cash flow generated from operations as a result of higher receivables and inventory. Nevertheless, EKIB’s D/E ratio at 0.64 times is well within the covenanted level of 1.5 times, while its FSCR ratio at 2.94 times is comfortably above the covenanted level of 1.5 times.

The interim 1H2006 results weakened further due to the continued decline in the domestic construction industry and escalating crude oil prices which resulted in further hikes in raw material costs. It recorded lower revenue of RM29.3 million and incurred a loss before tax and after tax of RM4.5 million and RM4.4 million respectively.

EKIB’s corporate debt ratings’ outlook is stable as the Group is refilling its domestic geosynthetic order books with more contracts under the Ninth Malaysian Plan (9MP) and foreseeable increases in industrial fabrics sales to Australia. The Group‘s order book stood at RM45.9 million as at August 2006.