RAM Ratings has reaffirmed the enhanced rating of BerjayaCity Sdn Bhd’s (BCity or the Company) RM150 million Danajamin-Guaranteed MTN Programme (MTN) at AAA(fg)/Stable.

Published on 27 December 2013

RAM Ratings has reaffirmed the enhanced rating of BerjayaCity Sdn Bhd’s (BCity or the Company) RM150 million Danajamin-Guaranteed MTN Programme (MTN) at AAA(fg)/Stable. The enhanced rating reflects an irrevocable and unconditional financial guarantee extended by Danajamin Nasional Berhad (rated AAA/Stable/P1 by RAM). The guarantee enhances the credit profile of the facility beyond BCity’s stand-alone credit strength. Under this structure, all risks associated with the MTN are expected to be absorbed by Danajamin.
BCity’s core business is the cultivation of oil palm. The Company’s ultimate parent is Berjaya Corporation Berhad (BCorp), a conglomerate with interests in a vast array of businesses.
With a planted area of 4,906 ha, BCity is a small player. It has a track record of healthy fresh fruit bunch (FFB) yields of above 20 MT per mature ha, slightly higher than the industry average. However, its production costs are high compared to that of its peers due to higher harvesting and labour costs arising from the hilly terrain of its estates as well as its large proportion of older and taller palms (about 40% of total planted area). Lacking in economies of scale, the Company’s smaller planted area has also contributed to its higher production cost structure. In a bid to reduce costs and improve productivity, BCity is conducting a replanting exercise to replace its older palms with better seedlings.
As at end-FY Apr 2013, BCity’s gearing ratio had weakened to 1.74 times (end-FY Apr 2012: 1.52 times) following a dividend declaration which crimped its retained earnings. Weaker crude palm oil prices and production have affected the Company’s cash-generation profile, and consequently its debt-servicing metrics. Its funds from operation debt coverage reduced to 0.04 times in FY Apr 2013 (FY Apr 2012: 0.11 times). Over the next 3 years, BCity’s gearing level is expected to taper from 1.71 times to 1.5 times (in line with the commencement of its debt repayment). However, its operating cashflow (OCF) is likely to remain poor, translating into a weak OCF debt coverage ratio of around 0.02 times.
“BCity derives financial flexibility from its ultimate parent, BCorp, who has previously extended financial support to the Company and provided a corporate guarantee to Danajamin for the MTN,” noted Thong Mun Wai, RAM’s Head of Real Estate and Construction Ratings. As at end-April 2013, advances from BCorp totalled RM199 million; these amounts are subordinated to the MTN. We envisage that BCorp will continue to extend financial support to the Company should the need arise.

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Robert Ching
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robertching@ram.com.my