KNM Capital Sdn Bhd - 2007

MARC has upgraded KNM Capital Sdn Bhd’s (KNMC) long-term rating from A+ID  to AA-ID, and reaffirmed its short-term rating at MARC-1 with respect to KNMC’s RM300.0 million Murabahah Underwritten Notes Issuance Facility / Islamic Medium Term Notes (MUNIF/IMTN). The rating carries a stable outlook.  KNMC is a wholly-owned subsidiary of KNM Group Berhad (KNM) and serves as the Group’s centralized funding and treasury vehicle. The rating upgrade reflects KNM’s favourable level of profitability over the last several years, its success in integrating acquired businesses, and improved capitalization. In addition, the rating also reflects its competitive strength as one of the largest manufacturers of process equipment in the region; its global platform and increasing presence in key international markets; strong technical expertise, and ability to offer a wide range of products; and proven track record of operational performance.

KNM is an investment holding company with subsidiaries principally involved in the design, manufacture and fabrication of a diverse range of process equipment used in the oil, gas, petrochemicals, minerals processing, desalination and renewable energy industries. Over the years, KNM’s vertical integration into the higher-end segment of process equipment market was achieved mainly via strategic acquisitions and successful joint ventures. Since 2003, KNM has strengthened its overseas presence namely in Oceania, Asia, North and South America, Europe and North African. Export revenue represented 94.6% of its RM909 million revenue in FY2006. Its customer base, comprising established oil majors and reputable oil and gas companies, limits credit risk exposure.

KNM’s current order book has improved significantly to RM2.2 billion as at September 2007, compared to RM1.2 billion in June 2006, reflecting acquisition related growth as well as its strong track record and capability in securing new contracts. The current order book is expected to sustain KNM up to 2009. Both its wholly owned subsidiaries, KNM Pty Ltd (KPL) and FBM Hudson Italiana Spa (FBM), which were acquired in FY2006, have allowed KNM to move further up the value chain, evident from more than one-third contribution to the group’s revenue in FY2006, mostly in the high premium product segment.

Future earnings growth will partly be driven by additional manufacturing capacity in Brazil, Canada, UAE and Indonesia. In order to cater to the prevailing high global demand for process equipment, particularly in Canada for the oil sands  related businesses, KNM is expected to spend  around RM50 million to RM60 million in demand-driven capital expenditure over the next two years. Meanwhile, in the first half of 2007 KNM had entered into joint ventures (JV) with Crown Iron Works, a US-based biodiesel plant design specialist; and, Saudi Arabia-based, Themar Aqaria Ltd. Co. The JV will enable KNM to tap into the growing renewable energy industry and strengthen the Group’s presence in oil, gas and petrochemical industries in Saudi Arabia. KNM’s rapid expansion strategy bodes well with current record breaking prices witnessed in the oil and gas industry.

Based on FY2006 results, KNM’s operating profit margin continues to be double digit, at 15% while Debt to Equity (DE) ratio has declined to 0.50x (FY2005: 0.70x), attributed to higher retained earnings and increased share capital via a private placement exercise. Debt servicing capacity remains strong although cash flow from operations (CFO) have somewhat weakened on account of higher trade debtors and lower trade payables. However, based on Q3 2007 interim results, CFO has significantly improved following the implementation of more payment milestones in respect of trade receivables. KNM’s financial flexibility is considered good, supported by cash and bank balances amounting to RM123.1 million and unutilized banking lines of over RM600 million.

Major Rating Factors

Strengths

• Favorable level of profitability over the last several years;
• Strong order book position;
• Success in integrating acquired businesses; and
• Competitive position as a leading manufacturer of process equipment in the region.

Challenges/Risks

• Strong competition from global players.