RAM Ratings assigns first-time global ratings to KLK, reaffirms national ratings of Islamic facilities

Published on 14 November 2013

RAM Ratings has assigned global corporate credit ratings of gA3/Stable/gP2 to Kuala Lumpur Kepong Berhad (KLK or the Group). This is the first time KLK is obtaining a global rating. At the same time, we have reaffirmed the national-scale ratings of KLK’s RM300 million Sukuk Ijarah CP/MTN Programme (2011/2016) and Multi-Currency IMTN Programme of up to RM1 billion (or its equivalent in foreign currencies) (2012/2022) at AA1/Stable/P1 and AA1/Stable, respectively.

KLK is an established integrated player in the oil-palm plantation sector, with a significant presence in the upstream and downstream segments. “The ratings reflect the Group’s position as one of the largest plantation companies in Malaysia and among the top 10 globally, backed by its sizeable oil-palm planted area of 192,848 hectares (ha) as at end-March 2013,” explains Thong Mun Wai, RAM’s Head of Real Estate and Construction Ratings. “The ratings are further supported by KLK’s favourable operating track record, with fresh fruit bunch and crude palm oil (CPO) yields that are comparable to large regional peers. The Group’s favourable productivity metrics are a testament to its good plantation management, while its efficient cost structure further allows it to weather CPO price downcycles,” he adds.

Despite the full drawdown of its IMTN programme last year, we still view KLK’s balance sheet as strong, aided by its large capital base. The Group’s debt increased to RM2.40 billion as at end-June 2013, translating into a gearing ratio of 0.32 times (end-June 2012: RM1.62 billion and 0.22 times), although its typically hefty cash pile kept its net gearing ratio at a conservative level of less than 0.10 times. KLK’s debt is projected to remain around the current band of RM2-RM2.50 billion over the next 1-2 years, translating into gearing ratios of 0.20-0.30 times. We expect its debt-protection metrics, as measured by funds from operations debt cover and operating cashflow debt cover, to remain strong at around 0.50 times over the same period. The Group’s sturdy balance sheet will help it withstand periods of bearish CPO prices and any hiccups in its downstream ventures. Further, KLK is seen to have a healthy liquidity profile and strong financial flexibility.

The ratings are constrained by KLK’s ambitious expansion of its oleochemical-manufacturing capacity, which will substantially boost its capacity from 1.6 million metric tonnes (MT) per annum currently to about 2.2 million MT per annum when its expansion projects are completed in FY Sep 2014. We are cautious of its downstream expansion, given the keen competition (particularly within the basic oleochemicals sphere) and the industry’s vulnerability to high feedstock costs. These concerns are somewhat balanced by KLK’s longstanding track record and the steady demand for basic oleochemicals from developing nations. The profitability of the Group’s manufacturing segment has also improved in the last few quarters as a result of weaker feedstock costs.

The ratings also take into consideration the risks inherent in the plantation sector, including volatile CPO prices which largely dictate the bottom line of oil-palm planters. The price of CPO, as a commodity, is subject to many factors beyond the planter’s control. With more than half of its planted land bank located in Indonesia, KLK is also exposed to the more challenging operating environment in the republic. This includes complicated and lengthy negotiations with existing landowners, potential disputes over land titles, underdeveloped infrastructure and a lack of reliable industry statistics.

Media contact

Karin Koh

(603) 7628 1174

karin@ram.com.my