Published on 24 Sep 2018.
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 of the ratings is supported by Batu Kawan's ability to maintain its strong financial profile amid weaker crude palm oil (CPO) prices. The Group's financial performance and credit profile largely mirror those of its 47%-controlled subsidiary, Kuala Lumpur Kepong Berhad (KLK), which contributes more than 90% and 80% of the Group's revenue and operating profit before depreciation, interest and tax (OPBDIT), respectively. The Group's integrated plantation business is parked under KLK, the sukuk programmes of which are rated AA1/Stable by RAM.
In 9M FY Sep 2018, the much weaker performance of the Group's plantation segment was somewhat buffered by the better showing of its manufacturing segment, supported by a rebound in the oleochemicals business. Meanwhile, the industrial chemicals segment also recorded healthier profits amid higher selling prices. Nevertheless, the Group's revenue and pre-tax profit still declined about 10% y-o-y.
Despite its weaker revenue and profit, Batu Kawan's gearing and funds from operations (FFO) debt coverage ratios remained strong at a respective 0.38 and 0.35 times as at end-June 2018. If its substantial cash balances (including highly liquid money-market instruments) are taken into consideration, the Group's net gearing ratio would only come up to 0.22 times while its FFO net debt coverage would stand at a robust 0.61 times. Batu Kawan's debt level had declined to RM4.89 billion as at end-June 2018 (end-June 2017: RM5.35 billion), as the lighter working capital of its manufacturing segment had reduced the need for short-term financing. Under RAM's stressed CPO price assumptions, we expect Batu Kawan's gearing and FFO debt coverage ratios to be maintained at around 0.4 and 0.3 times, respectively, which remain commensurate with its ratings.
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, with integrated operations spread across Malaysia, Indonesia, Liberia, Europe and China. The Group's favourable tree maturity profile and fairly lean cost of production will continue to provide it with a sufficient buffer to weather industry downcycles. 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 (i.e., 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 palm oil refining and oleochemicals 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 operational risk.
Thong Mun Wai
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