Emas Kiara Industries Bhd - 2008

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 EKIB’s leadership in the domestic geosynthetic market, improved financial performance as well as enhanced operational efficiency and cost savings derived from ongoing plant integration and upgrading exercises. Moderating the ratings are the impact of rising raw material prices and prevailing uncertainty in the domestic construction sector.

With an estimated 60% market share, EKIB is the leading geosynthetic manufacturer in Malaysia. As a one-stop geosynthetic solution provider, it has a comprehensive product range and offers a wide range of services including engineering design, manufacture, customisation and installation.

EKIB has since completed the integration of its woven operations at its Senawang Plant where it is currently installing new non-woven machines. The Senawang plant will eventually house its entire operations of woven, non-woven, and industrial fabrics resulting in enhanced operational efficiency and cost savings.    

While raw material prices have been rising due to the uptrend in crude oil price in 2007, EKIB has been able to pass through costs on certain geosynthetic products such as geotubes, geomatttress, geocell and woven geotextiles due to growing demand, its dominant market position, and its ability to customise products according to customers’ specifications. However, margins on project sales have been eroded as contracts had been locked in at prevailing polymer prices. Nonetheless, EKIB has negotiated for shorter term contracts and is keeping a tight delivery schedule, or proposing the use of polyester as an alternate material to mitigate the impact of rising raw material prices. Furthermore, the oligopolistic characteristic of the domestic geosynthetic industry has hindered price-based competition.

The demand for geosynthetic products is closely linked with the level of construction activity, in particular civil and environmental engineering works. Domestic demand of geosynthetic products improved in FY2007 following a recovery in the construction industry. In addition, there has been rising regional demand for geosynthetic products as evidenced by increased expenditures on environmental related engineering projects. EKIB has positioned itself as an environmental engineering supplier on the back of growing environmental awareness after a number of catastrophic disasters in the region. The group is currently operating on a 24 hour basis to meet its geosynthetic orders.

EKIB has diversified into industrial fabrics to increase its recurring income, and to mitigate effects of cyclical demand in the geosynthetic sector. In addition, EKIB exports its products to Australia, South East Asia, Bangladesh, Sri Lanka, the Middle East and Africa, to widen its customer base and decrease its exposure to local market factors. The group is stepping up efforts to increase export sales to 50% of total revenue within the next five years (FY2007: 27.9%).

The group’s performance turned around in FY2007, registering a pre-tax profit of RM5.2 million (FY2006: negative RM9.7 million) on the back of RM102.9 million in revenue (FY2006: RM62.6 million). The group’s performance benefited from increased demand due to Ninth Malaysia Plan (9MP) related projects and the increase of exports sales. However, profitability was affected by raw material price increases, which the group was not able to transfer to customers as the bulk of the contract works was completed in 2007. Nonetheless, efficient operational cost management resulting from its on-going plant integration exercise moderated the margin pressures. Going forward, the group expects continuing steady demand and growth of its export sales to maintain its performance.

Challenges/Risks

• Rising raw material prices; and
• Uncertain outlook for the domestic construction industry.