RAM Ratings assigns AA1/Stable/P1 ratings to KLK’s Multi-Currency Islamic Debt Programme

Published on 01 August 2012

RAM Ratings has assigned respective preliminary long- and short-term ratings of AA1 and P1 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), 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 bunches (“FFB”) 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, the Group 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. “The Group’s debt protection measures have stayed strong, albeit slightly weaker than our expectations last year, which is reflective of the more challenging operating outlook for its oleochemical business,” he adds. The Group’s borrowings stood at RM1.97 billion as at end-March 2012. Bolstered by RM7.01 billion of shareholders’ funds and RM1.41 billion of cash, the Group’s net gearing remained conservative at 0.08 times as at end-March 2012. KLK’s funds from operations debt coverage ratio is envisaged to be between 0.75 and 0.90 times over the next 2 years. The Group’s performance remains firmly supported by continued demand for crude palm oil (“CPO”) from increasing food consumption and a constantly expanding world population.

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 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