RAM Ratings assigns AA1/Stable rating to KLK’s Multi-Currency Islamic Debt Programme

Published on 17 August 2012

RAM Ratings has assigned final long-term rating of AA1 to Kuala Lumpur Kepong Berhad’s (KLK or the Group) proposed 10-year Multi-Currency Islamic Medium-Term Notes Programme of up to RM1 billion (or its equivalent in foreign currencies) (“the Proposed Issue”), with a stable outlook.

At the same time, the ratings of the Group’s existing RM300 million Sukuk Ijarah Commercial Paper/Medium-Term Notes Programme (2011/2016) have been reaffirmed at AA1/Stable/P1.

KLK is an integrated oil-palm plantation player with established upstream and downstream activities. It is a leading planter in Malaysia and Indonesia with a sizeable plantation land bank of more than 250,000 hectares. The Group’s fresh fruit bunch yields rank among the top 5 in Malaysia and are comparable to those of its regional peers. Its established track record in the plantation sector is reflected in its commendable operating efficiency and lean cost structure. Despite the recent minimum wage policy, KLK is expected to maintain its low cost competitiveness.

“The Group’s ratings are also supported by its resilient balance sheet, strong cashflow-generating ability and healthy liquidity profile,” says Thong Mun Wai, RAM Ratings’ Head of Real Estate and Construction Ratings. “Based on recent discussion with management, we understand that the Group intends to fully draw down on the Proposed Issue. With the draw down, KLK’s debt level is envisaged to increase from RM1.97 billion (end-March 2012) to about RM2.70 billion for the financial year ended 30 September 2012. Given this, the Group’s capitalisation and debt coverage ratios are expected to be lower than earlier projected on account of the higher debt level. That said, the projected financial metrics are still supportive of its ratings,” he adds. KLK’s funds from operations debt coverage ratio is projected to range at around 0.45 and 0.50 times between 2012 and 2014 while its projected gearing ratio is envisaged to peak at around 0.30 times over the same period. KLK is expected to remain in a near net cash position. We deem the Group’s cashflow-generating ability to be strong; cashflow from operations is expected to amply fund projected capital expenditure. A portion of the RM1 billion in proceeds from the Proposed Issue will be utilised to facilitate an internal restructuring exercise; the Group has no immediate plans in respect of the remainder.

KLK’s ratings are moderated by its ambitious expansion into oleochemicals, an industry vulnerable to high feedstock prices and overcapacity, particularly in basic oleochemicals. In this regard, we believe the Group’s management will take a measured approach and maintain its robust balance sheet. The ratings also factored in inherent risks of the industry including volatile crude palm oil (“CPO”) prices which largely dictate the bottom-line of oil palm-based companies like KLK. Prices of CPO, as a commodity, are subject to many factors beyond the planter’s control. Additionally, regulatory changes including the recent change in the export tax structure in Indonesia, typify some of the additional risks associated with the industry.

Media contact

Chan Yin Huei

(603) 7628 1180

yinhuei@ram.com.my