Published on 24 Aug 2017.
RAM Ratings has reaffirmed the AA1/Stable rating of Batu Kawan Berhad’s (Batu Kawan or the Group) RM500 million Islamic Medium-Term Notes Programme (2013/2023).
The reaffirmation is premised on our expectations that the Group’s credit metrics will remain commensurate with the rating over the next 1-2 years, supported by recovery of its plantation production, the maturing of its young palms especially in Indonesia, and growth in its manufacturing segment. Batu Kawan’s credit metrics stayed intact and within expectations in 9M FY Sep 2017 despite weaker manufacturing profits and a heavier-than-expected debt load. The Group’s gearing and net gearing ratios stood at 0.41 times and 0.27 times, respectively, as at end-June 2017, while its annualised funds from operations (FFO) debt cover improved to 0.33 times in 9M FY Sep 2017 (9M FY Sep 2016: 0.30 times) on the back of higher profits. Given lower working capital requirements under our stressed CPO price expectations, the Group’s gearing and FFO debt coverage are envisaged to come in below 0.35 times and above 0.40 times, respectively, going forward.
In FY Sep 2016, the Group’s plantation segment suffered the lagged effects of the El Nino experienced in 2015. Batu Kawan’s overall fresh fruit bunch (FFB) production, mainly under its subsidiary, Kuala Lumpur Kepong Berhad (KLK), declined 8% y-o-y, resulting in lower yields. Nevertheless, overall FFB production rebounded by 7% y-o-y in 9M fiscal 2017, with stronger recovery noted in 2Q and 3Q fiscal 2017. This, along with higher average selling CPO prices, nearly doubled the Group’s plantation profits y-o-y, offsetting the poor contribution from its manufacturing segment whose profits plunged 55% y-o-y. KLK’s integrated operations and fairly lean cost structure will continue to provide an adequate buffer during price downcycles.
Despite a higher-than-anticipated debt level as at end-June 2017, Batu Kawan’s balance sheet remained strong with gearing within our expectations at 0.41 times as at the same date, while its large cash holdings kept its net gearing strong at 0.27 times. The increase in borrowings was attributable to short-term trade financing, taken on to meet the working capital needs of KLK’s enlarged mid- and downstream capabilities and its trading operations. Stronger profits expanded Batu Kawan’s annualised FFO debt cover to 0.33 times in 9M FY Sep 2017 (9M FY Sep 2016: 0.30 times).
Elsewhere, the rating continues to be underpinned by Batu Kawan’s strong business profile. The Group, through KLK, remained among the 10 largest planters in the world, supported by a sizeable oil palm planted area of more than 200,000 hectares across Malaysia, Indonesia and Liberia. Along with downstream assets in China and Europe, Batu Kawan’s strong position as a regional integrated planter partly cushions the effects of cyclical CPO prices. Apart from palm oil operations, Batu Kawan is also the leading chlor-alkali producer in Malaysia.
However, like most producers of commoditised products, the Group is susceptible to the volatility of commodity prices (e.g., CPO, chlor-alkali and sulphuric acid). The rating is also moderated by the challenging operating environment of the industrial chemical business as well as the mid- and downstream business, which have been plagued by persistent overcapacity and volatile feedstock costs. In addition, the tougher operating environment in Indonesia and added risks associated with the Group’s venture in Liberia heighten its exposure to operational risk.
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