MARC AFFIRMS ALL RATINGS ON KWANTAS SPV SDN BHD’S RM155 MILLION SUKUK IJARAH AND RM65.0 MILLION MURABAHAH CP/MTN PROGRAMME

Jan 4, 2013 -

MARC has affirmed its AAAID rating on Kwantas SPV Sdn Bhd’s (Kwantas SPV) outstanding RM40.0 million Class A asset-backed Sukuk Ijarah. The rating outlook remains stable. Concurrently, MARC has also affirmed its ratings on Kwantas SPV’s RM65.0 million Murabahah Commercial Papers/Medium Term Notes (CP/MTN) Programme at MARC-2ID(cg) /A-ID(cg) with a stable outlook. As the Murabahah CP/MTN Programme is backed by a corporate guarantee by the originator, Kwantas Corporation Berhad (KCB), the ratings and outlook are equalised with KCB’s corporate credit ratings which MARC has affirmed at MARC-2/A-.

The affirmed rating of the Class A sukuk is underpinned by the robust performance of the securitised plantation estates, particularly its fresh fruit bunch (FFB) production and net operating income (NOI). The affirmed rating also incorporates the collateral’s strong loan-to-value (LTV) ratio of 12.6%, which is consistent with a AAA rating. The LTV reflects MARC’s discounted cash flow valuation of RM315 million which in turn was derived from dividing the estates stabilised NOI of RM34.7 million by a capitalisation rate of 11%. The NOI in financial year ended June 2012 (FY2012) remained strong at RM52.2 million (FY2011: RM48.0 million) despite an increase in operating expenses to RM46.5 million (FY2011: RM43.6 million). The stable outlook on the rating reflects MARC’s expectation that the securitised estate will remain profitable despite the continuing volatility in crude palm oil (CPO) prices. The NOI of the securitised estates should comfortably cover principal repayments on the outstanding sukuk of RM40.0 million over its remaining tenure of two years.

As of August 31, 2012, the securitised estates comprise 8,247 ha of planted land, of which 99.2% are matured. Of the total mature area, approximately 75.8% or 6,201 ha of plantations are aged above 16 years. While the FFB production increased to 177,139 metric tonnes (MT) from 175,843 MT during the review period, the FFB yield has noticeably declined over the past five years as a result of its aging plantation profile. Nevertheless, the yield performance has consistently exceeded Sabah’s and Malaysia’s average fresh FFB yields. MARC expects that more than half of the area of the securitised estates would require replanting after three years. However, replanting is only expected to take place after the final redemption of Kwantas SPV’s debt obligations.

Meanwhile, the affirmed ratings and outlook on the Murabahah CP/MTN Programme reflect KCB’s satisfactory creditworthiness supported by its cash flow generation ability. In FY2012, KCB recorded revenue and pre-tax profit of RM1.3 billion and RM49.2 million respectively (FY2011: RM1.25 billion and RM148.0 million). The lower pre-tax profit is largely due to the pre-tax losses incurred by its oleochemical business segment mainly in respect of its Guangzhou-based subsidiary which has ceased operations since December 2009 and glycerine and oleochemical producing subsidiary in Zhangjiagang which has been experiencing declining margins. The decrease in FY2012 pre-tax profit was also partly resulted from the group’s one-time gain on disposal from the sale of land and subsidiary of RM52.6 million in the previous financial year.

KCB’s cash flow generation remained at a satisfactory level with its cash flow from operation (CFO) at RM72.8 million (FY2011: RM73.9 million). Going forward, MARC expects to see limited free cash flow generation at KCB due to the capital expenditure planned for its estate replanting exercise. KCB’s cash reserve of RM129.8 million and low debt burden remain key credit drivers for the company and its rating momentum.

Contacts:

Ng Chun Kean, +603-2082 2230/ chunkean@marc.com.my

Jason Kok, +603-2082 2258/ jason@marc.com.my

David Lee, +603-2082 2255/ david@marc.com.my