Emas Kiara Industries Bhd - 2007

MARC has affirmed the ratings of Emas Kiara Industries Bhd’s (EKIB) RM80 million Partially Underwritten Murabahah Notes Issuance Facility / Islamic Medium Term Notes Issuance Facility (MUNIF/IMTN) at AID / MARC-2ID. The outlook is Stable. The ratings reflect a turnaround in the geosynthetic industry after weaker than expected operating performance in 2006. Additionally, the Group’s rising working capital needs, brought on by its increasing finished goods inventory, continues to put pressure on cash flow measures. The ratings also take into account EKIB’s leading position in the domestic geosynthetic market, its enhanced efficiency, and cost savings following the completion of a plant integration exercise.

The domestic geosynthetic industry displays oligopolistic characteristics with avoidance of price-based competition among its players. The demand for geosynthetics is highly correlated with construction activity, in particular civil engineering and environmental works. The domestic construction sector has recorded two quarters of positive growth after ten quarters of decline. This has resulted in a turnaround in the geosynthetic industry which is evident from the 2Q07 results and EKIB’s increasing order book. The Group is now operating three shifts to meet its geosynthetic orders.

EKIB is the leading geosynthetic manufacturer in Malaysia with an estimated 60% market share. The Group produces a diverse range of geosynthetic products and provides total solutions including engineering design, manufacture and installation. EKIB has diversified into industrial fabrics to increase its recurring income source and to mitigate demand cyclicality in the geosynthetic sector. EKIB exports its products to Australia, South East Asia, the Middle East and Africa.

EKIB completed its plant integration exercise in October 2006 to streamline its woven and industrial bulk bag manufacturing facilities in Senawang, non-woven and polypropylene fibres operations in Rawang, and circular bag production in Seberang Prai. This exercise has enhanced production efficiency and reduced fixed overhead costs to 21% of total revenue in 2Q07 from 37% in FYE06.

EKIB’s operating performance in 2006 was poor as a result of a contraction in geosynthetic sales and resulted in the Group reporting a net loss of RM9.2 million on the back of RM62.58 million in revenue. Operating margins declined from 7.3% in FY05 to negative 10.6%. Group gearing which had been consistently below 1.00 times rose to 1.03 times in FY06 as a result of the reported losses and debt-financed capital expenditure incurred on the plant integration. EKIB has recovered with RM1.7 million of net profit in 2Q07 after recording a loss of RM0.9 million in 1Q07.

While raw material prices have been rising due to the uptrend in crude oil prices, EKIB’s ability to raise prices to accommodate the impact of rising raw material cost has been constrained by the contracts being negotiated at prevailing polymer prices. To mitigate the impact of rising input costs on profitability, EKIB has adopted the following measures: negotiating shorter term contracts and keeping to rigid product delivery schedules or proposing the use of polyester as an alternate material.