MARC has reaffirmed its AID/MARC-2ID ratings on Emas Kiara Industries Bhd’s (EKIB) RM80 million Partially Underwritten Murabahah Notes Issuance Facility / Islamic Medium Term Notes Issuance Facility (MUNIF/IMTN). The outlook is Stable. The ratings reflect EKIB’s leading position in the domestic geosynthetic market and its enhanced operational efficiency and cost savings derived from plant integration and upgrade exercise. Moderating the ratings is the effect of slower anticipated domestic construction activities in the coming quarters on demand and the ability of producers to recover raw material cost increases. 

EKIB is the leading geosynthetic manufacturer in Malaysia with an estimated 60% market share. The Group provides one-stop geosynthetic solutions encompassing engineering design, manufacturing, customization and installation.

EKIB completed the integration of its woven operations at its Senawang Plant after relocating operations from its factories in Rawang and Seberang Prai in October 2006. The Group is currently installing new non-woven machines at its Senawang plant and will eventually locate its entire operations of woven, non-woven, and industrial fabrics there.

EKIB has been able to pass through higher raw material costs on certain specialised geosynthetic products but faces constraints with respect to project based sales negotiated at prevailing polymer prices. Nonetheless, geosynthetic project sales contributed only 24.3% of total revenue in FY2007. To mitigate these risks, EKIB maintains a two-month inventory of raw material sufficient for two months’ production requirements and advanced ordering of polyester yarn for the next three months to buffer rising prices of raw materials. Other measures include shorter term contracts, tight delivery schedules or the use of polyester as an alternate material. Additionally, the oligopolistic structure of the domestic geosynthetic industry has averted price-based competition.

The demand for geosynthetic products is highly correlated with construction activity, in particular civil engineering and environmental works. Demand of geosynthetic products increased in FY2007 following an upturn in the domestic construction sector and growing regional demand in the wake of a number of catastrophic disasters in the region. EKIB has ventured into the manufacturing of industrial fabrics to broaden product lines and to mitigate its exposure to demand cyclicality of the geosynthetic sector. EKIB also exports its products to Australia, South East Asia, Bangladesh, Sri Lanka, the Middle East and Africa, to reduce its dependence on domestic demand for geosynthetic products. The Group is stepping up efforts to increase export sales to 50% of total revenue in 5 years (FY2007: 27.9%). The Group is currently operating its plants 24 hours daily to meet geosynthetic orders.

EKIB turned around in FY2007, with a pre-tax profit of RM5.2 million after reporting a RM9.7 million of pre-tax loss in FY2006. Revenue rose to RM102.9 million (FY2006: RM62.6 million) following increased domestic demand from 9MP related projects and higher exports sales. Although profitability was affected by increases in raw material prices in 2007, the downward pressure on margins was moderated by improved cost efficiency arising from its on-going plant integration exercise. In FY2007, EKIB’s net cash flow from operations remained negative, with a deficit of RM1.1 million (FY2006: negative RM0.9 million) due to a surge in its receivables in line with a 64.5% increase in revenue. EKIB’s healthy trade receivables’ ageing somewhat mitigates receivables collection risk. The group maintained compliance with its financial covenants in FY2007, maintaining a gearing level of 1.20 times below the covenanted 1.50 times and a finance service coverage ratio (FSCR) of 2.08 times above the covenanted 1.50 times.

The stable rating outlook reflects expectations that EKIB would demonstrate some earnings resilience in light of its improved product line diversity and end markets.