May 13, 2013 -
MARC has affirmed the rating on
Boustead Holdings Berhad’s (Boustead) RM1.0 billion Bank Guaranteed Medium Term
Notes (BG MTN) programme at AAA(bg) with a stable outlook. The rating reflects
the credit strength of the syndicated bank guarantee facility provided by OCBC
Bank (Malaysia) Berhad (OCBC Malaysia), Public Bank Berhad (Public Bank),
Malayan Banking Berhad (Maybank) and The Bank of East Asia (BEA) Labuan Branch.
MARC has maintained the financial institution ratings of AAA/Stable on the
aforementioned banks; the ratings on OCBC Malaysia and Public Bank are based on
public information. Any subsequent rating actions on the rated programme will
reflect a 'weak link' approach to credit enhancement; the rating on the BG MTN
programme cannot be higher than that of the lowest rated supporting financial
institution.
Boustead’s standalone credit
profile, incorporates its diversified business mix and its status as a
government-linked corporation that is reflected in the strong support extended
by its major shareholder Lembaga Tabung Angkatan Tentera (LTAT), a statutory
body established in 1973. These factors are counterbalanced by its recent
debt-funded acquisitions that have led to an increased leverage position and
weak cash flow protection measures which are partly attributed to an aggressive
dividend policy.
Boustead is a holding company
with subsidiaries and associates involved in diverse businesses that have been
categorised into six divisions: plantation, property, pharmaceutical, trading
& manufacturing, heavy industries, and finance & investment. Of these,
the plantation division, which registered an operating profit of RM206 million
for financial year ended December 31, 2012 (FY2012) (FY2011: RM299 million),
remains the largest contributor to group operating profit at 33.3% (FY2011:
40.6%). The division was affected by the recent decline of crude palm oil (CPO)
prices; its average CPO selling price fell by 11.3% to RM2,902/MT in FY2012
(FY2011: RM3,272/MT). MARC expects the challenging prospects for the plantation
industry in 2013 to weigh on the near-term performance of the division. The
division has 81,333 ha plantation land as at end-2012 (FY2011: 96,393 ha), all
of which are located in Malaysia following the large disposal of 14,857 ha of
land in Indonesia for RM119.5 million.
Boustead’s property division
which includes development, investment and hotel operations registered a
decline in operating profit to RM161 million in FY2012 (FY2011: RM211 million),
largely on account of lower fair value gains and fewer launches. Nonetheless,
the division’s performance will be supported by current projects as well as
moderate landbank size that affords further property development activities;
steady rental stream from its retail malls and office buildings; and the
operations of five hotels under the “Royale” brand that have achieved moderate
occupancy levels. MARC observes Boustead’s heavy industries division continued
to drag group earnings, registering an operating loss of RM97 million in
FY2012, largely attributable to prevailing weakness in its commercial
shipbuilding sub-segment. The losses in the year have been buffered to a
certain extent by the positive contribution from the recently acquired MHS
Aviation Bhd, which has a 50% market share of the offshore oil-and-gas
helicopter service market.
The weaker performance of the
plantation, property and heavy industries divisions have been somewhat
mitigated by the improved performance of the trading & manufacturing
division (mainly from BHPetrol), finance & investment division (Affin
Holdings Berhad) and the pharmaceutical division (mainly from Pharmaniaga
Berhad’s role as sole concessionaire to supply approved drugs to government hospitals).
For FY2012, group consolidated revenue rose 19.3% y-o-y to RM10.2 billion
(FY2011: RM8.5 billion) while pre-tax profit declined 25.5% to RM619 million
(FY2011: RM831 million). MARC also notes the group’s operating cash flow (CFO)
fell to negative RM422 million in FY2012 (FY2011: positive RM903 million)
while free cash flow worsened to negative RM1.6 billion (FY2011: negative
RM241.4 million) on continued acquisitions, capital outlays and dividends. The
largely debt-funded acquisitions of businesses, including MHS Aviation and
Pharmaniaga, have resulted in a sharp increase in group borrowings to RM6.6
billion (FY2011: RM5.1 billion; FY2010: RM3.2 billion), leading to a rise in
the gearing level to 1.23 times (FY2011: 0.98 times).
At the holding company level,
Boustead derives its revenue largely from dividends from its subsidiaries and
associate companies. For FY2012, the total dividends received stood at RM469
million (FY2011: RM360 million) but with sizeable dividend payout of RM351.7
million (FY2011: 394.8 million), cash retention has been minimal. Coupled with
a high finance cost of RM126 million (FY2011: RM103 million) arising from
increased borrowings which stood at RM1.95 billion (FY2011: RM1.82 billion),
holding company credit metrics have weakened. In addition, MARC observes that
60% of its total borrowings are short-term in nature which exposes the company
to rollover and refinancing risks that are somewhat mitigated by Boustead’s
good accessibility to financial and capital markets. MARC believes that
near-term strengthening of the holding company’s credit measures could stem
from observing a more prudent dividend policy from the current minimum 70%
dividend payout, improving the dividend generating ability of Boustead’s
subsidiaries as well as exercising greater discipline on any further
debt-funded acquisitions.
Noteholders are, however,
insulated from the downside risks in relation to Boustead’s credit profile by
virtue of the irrevocable and unconditional bank guarantee provided by the
consortium of banks. Any changes in the supported rating or rating outlook will
be primarily driven by changes in the consortium of banks’ credit
rating/outlook.
Contacts:
Nisha Fernandez, +603-2082 2269/
nisha@marc.com.my;
Rajan Paramesran, +603-2082
2233/ rajan@marc.com.my.
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