Emas Kiara Industries Bhd - 2010

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 MARC-2ID / AID. The rating outlook is revised to stable from developing.

Since MARC’s review at end-August 2009, the rating agency’s concerns over the execution and collection risks attached to EKIB’s first foreign contract to install geodykes along the Brahmaputra River in Assam, India have eased with the substantial completion on work under the contract and collection of 73.44% of billed receivables as of mid-August 2010.

The affirmed rating reflects EKIB’s strong track record as a leading player in the domestic geosynthetic industry. EKIB is mainly involved in the manufacturing, fabricating, supplying and installing of a variety of geosynthetic products. Moderating the ratings are the limited growth potential in the domestic market which necessitates an increased reliance on foreign contracts to grow its sales, the lack of long-term earnings visibility afforded by the short-term nature of its contracts and its moderately high leverage position, albeit within its gearing ratio covenant of 1.5 times. MARC expects EKIB’s near-term working capital needs to increase in line with higher revenues. As a result, operating cash flow generation could remain constrained.

Bursa Malaysia-listed EKIB, which has three manufacturing plants in Senawang, Negeri Sembilan and Rawang, Selangor, has  a current order book of RM93.3 million as at March 31, 2010 and is expected to secure up to RM82 million worth of projects. While the existing projects are expected to provide EKIB with earnings visibility for at least a year, the group is seeking to increase its sales by expanding its presence outside Malaysia. This strategy poses higher cross-border risks for the group, in particular credit, currency, political as well as legal risks. For fiscal FY2009 export sales represented 49% of its revenue, contributed mainly by the Assam contract. The group’s top 20 customers contributed approximately 55% of its revenue for the 12-month period ended December 31, 2009 (FY2009). EKIB’s customer base includes leading local construction players such as WCT Berhad, Gamuda Berhad and Ahmad Zaki Resources Bhd, from which EKIB has been able to secure repeat orders.

For FY2009, EKIB registered an 8.5% decline in revenue to RM137.45 million from RM150.26 million in FY2008, attributable to a downward adjustment to selling price of its products arising from lower raw material prices during the year. Its revenue includes the maiden contribution from its Assam contract of RM39.03 million which comprised 29% of the total revenue. However, pre-tax profit was lower at RM10.86 million (FY2008: RM13.26 million) due to impairment cost of RM2.15 million (FY2008: RM0.35 million) caused mainly by the relocation of the production line and cessation of its fibre production line as well as a RM2.36 million inventory writedown to its net realisable value (FY2008: RM0.17 million).

For the six-month period ended June 30, 2010 (1HFY2010), revenue rose by 111% to RM109.9 million from RM52.3 million in 1HFY2009. The increase in revenue was due to higher contribution from its domestic market coupled with the substantial progress of the Assam contract during the period. Despite the higher revenue, the operating profit margin fell to 7.7% from 10.5% due to unexpected additional costs brought about by adverse weather conditions in Assam as well as impairment losses on machineries amounting to RM1.44 million in the first and second quarter of FY2010 respectively. 

EKIB generated negative net cash flow from operations (CFO) of RM10.7 million during 1HFY2010 due to an increase in its inventories and receivables compared to its December 2009 levels. As of June 30, 2010, the group’s leverage position improved marginally, with its debt-to-equity ratio declining to 1.05 times from 1.11 times in FY2008 despite higher borrowings of RM83.1 million (FY2008: RM79.8 million). Around 76% of EKIB’s borrowings are short term, mainly comprising its outstanding MUNIF of RM40 million which is used to support its working capital requirements. EKIB’s outstanding RM10 million IMTNs are due in August 2011 while its RM40 million underwritten MUNIF expires in December 2012. There is therefore a certain degree of refinancing risk for 2011 and 2012. EKIB’s past performance and satisfactory order book position provides partial comfort against this risk. EKIB will have to refinance its MUNIF to maintain sufficient liquidity to meet its operational obligations.

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