Emas Kiara Industries Bhd - 2009

MARC has affirmed the ratings of geosynthetic manufacturer, 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. At the same time, the rating outlook has been revised to developing from stable.

The outlook revision is due to EKIB’s increased business risk exposure as reflected by its recent foray into the less-developed and strife-torn north-eastern Indian state of Assam which had awarded the company a RM72 million contract to supply and install geotextile tubes.  This contract, which constitutes a sizeable 53% of its current total order book of RM141.7 million, exposes EKIB’s to single project concentration risk. Originally scheduled to be completed in July 2009, the project which is aimed at strengthening flood mitigating measures along the Brahmaputra river in the state has been delayed to poor weather conditions and is now expected to be only completed by end-2009. Offsetting the project’s delay and credit risks to a certain extent are the advance payment received from the Assam state government, which represents 30% of the contract value, and the project’s short installation period.

The affirmed rating is supported by EKIB’s leading market position in the local geosynthetics industry with a 60% market share, attributable to the group’s sound track record, improved operational efficiency following a plant integration exercise and its ability to offer a wide range of geosynthetics-based solutions encompassing engineering design, manufacturing, customisation and installation. Moderating the ratings are the relatively small size of the domestic geosynthetics industry that has inhibited EKIB’s growth, the exposure to the volatility of petroleum price and the absence of government-mandated requirements that may lead to wider application of the more environment-friendly geosynthetic materials in construction activities. MARC notes that the company’s increased risk appetite for foreign projects and its decision to venture abroad is due in part to the limited growth opportunities in its domestic market. The company is aiming to increase its revenue from overseas markets to 40% of its total revenue in the near term.

EKIB’s financial profile revealed substantial improvement for financial year ending December 31, 2008 (FY2008), reflected by increasing sales and profitability as well as a strengthening of cash flow. During the year, revenues grew by a respectable 46%, with the operating margin increasing to 12.35% from 9.14% in FY2007 on higher development projects brought on under the government’s Ninth Malaysia Plan. Going forward, the group is also likely to benefit from the rollout of construction projects under the government’s RM67 billion stimulus packages.

EKIB registered a higher operating profit of RM18.56 million in FY2008 (FY2007: RM9.41 million) despite the sharp rise in petroleum prices in the first half of 2008 as it was able to pass on most of the cost increase in raw materials, namely polypropylene and polyester, used in the manufacture of geosynthetics. Raw material costs constituted about 67.9% of its production cost in FY2008 (FY2007: 63.4%). For first quarter of 2009 (1QFY2009), EKIB registered revenue and pretax profit of RM28.86 million and RM2.10 million respectively (1QFY2008: RM28.19 million, RM1.02 million).

For FY2008, the group’s cashflow from operations turned positive for the first time since FY2006 to RM21.91 million, on account of its improving operating performance and smaller increase in working capital requirements, boosting its cash and bank balances to RM25.43 million. The company remained in compliance with its financial covenants under the notes. EKIB’s debt-to-equity (DE) ratio remained relatively unchanged at 1.11 times below the covenanted 1.5 times despite a RM10.0 million increase in total borrowings owing to a proportionate increase in retained earnings. The company’s financial service cover ratio (FSCR) of 4.15 times showed improvement relative to its FY2007 level of 2.08 times, and increased headroom compared to its covenant of 1.5 times.

Developments on EKIB’s Assam-based project remain a key rating driver and consideration in any subsequent revision of MARC’s rating outlook to stable, along with the company’s ability to demonstrate sustained financial performance and improvements in cashflow coverage.

Major Rating Factors

Strengths

• Strong market position in the domestic geosynthetics industry; and
• Improving export sales.

Challenges/Risks

• Execution and project concentration risks in relation to the recently awarded Assam-based project;
• Dependence on government spending for infrastructural development; and
• Exposure to volatile petroleum prices.