MARC has assigned, with Positive Outlook, ratings of A+ID/MARC-1ID to KNM Capital Sdn Bhd’s (KNMC) proposed RM300.0 million Murabahah Underwritten Notes Issuance Facility / Islamic Medium-Term Notes (MUNIF/IMTN). KNMC is a wholly-owned subdisiary of KNM Group Berhad (KNM) and was created to serve as the centralised funding and treasury vehicle for the KNM group. The ratings are premised upon KNM’s competitive position as one of the largest manufacturers of process equipment in the region; growing international exposure; access to high technical expertise and ability to offer a wider range of products through the acquisitions of key players in the industry; healthy order book; proven track record; and improving financial profile. These positives are, however, moderated by the pace of expansion trails that may increase the group’s operating risk profile.

KNM is an investment holding company with subsidiaries principally involved in the manufacture of a diverse range of process equipment used in the oil, gas, petrochemicals and minerals processing industries. Since its listing on Bursa Malaysia in 2003, KNM has steadily moved into the high-end segment of the process equipment market and expanded its reach to the booming minerals processing industry.

Through expansion and strategic acquisitions, the group continues to strengthen its position overseas; with presence in the Oceania, Asia, North and South America, Europe and African regions. Export revenue has notably increased from 61.0% in FY2003 to over 95.0% in FY2005. Its customer base, comprising established oil majors and reputable oil and gas companies, minimizes credit risk.

The group’s current order book stood at about RM1.2 billion as at July 2006 whilst its tender book size amounted to approximately RM6.0 billion. The acquisitions of FBM-Hudson Italiana SpA (FBM) and KNM Pty Ltd (KPL) are expected to benefit KNM through high-end technology, increased competitive position as it is able to offer a larger range of products, enlarge its network of customers through an increased international presence, and increase the group’s manufacturing capacity. Future earnings growth will be driven by the additional capacity from the expansion at the China plant coupled with the additional capacities in Europe (FBM), Australia (KPL), Indonesia and Brazil. By 2007, the group expects to have an enlarged production capacity of nearly 100,000 tonnes per annum vis-à-vis its current capacity of 46,500 tonnes per annum.

As a contract manufacturer, KNM hedges its raw material costs and foreign exchange exposure to protect its profit margins. For the financial year ended December 2005, KNM recorded significant growth in its revenue and pre-tax profit to RM343.9 million and RM53.1 million respectively, aided by strong demand for process equipment on the back of rising oil prices as well as contributions from the Alcan Gove minerals processing project in Australia. Operating profit margin was robust and in double digits, comparable to similar rated peers in the industry.
 

Assuming full drawdown of the proposed facility, pro forma debt leverage level is expected to reach 1.10 times. Under the proposed issue structure, a debt leverage limit of 1.75 times has been imposed. The cash flow projection demonstrates robust cash flow protection measures but is vulnerable to reduction in revenue and higher cash outlays to its suppliers. KNM has to ensure a minimum FSCR level of 1.50 times during the tenure of the debt facility.