RAM Ratings has reaffirmed the global corporate credit ratings of Kuala Lumpur Kepong Berhad (KLK) at gA3/Stable/gP2.

Published on 06 August 2014

RAM Ratings has reaffirmed the global corporate credit ratings of Kuala Lumpur Kepong Berhad (KLK) at gA3/Stable/gP2. 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.
The ratings reflect KLK’s position as an integrated oil-palm plantation company with a longstanding track record within the upstream and downstream segments. KLK is the third-largest plantation company in Malaysia and among the top 10 globally, with a sizeable oil-palm planted area of 193,337 hectares (ha) as at end-March 2014. As expected, KLK’s fresh fruit bunch yield improved to 22.51 metric tonnes (MT) per mature ha in FY Sep 2013 (FY Sep 2012: 21.33 MT/mature ha), backed by yield recovery, particularly at its Sabah estates which were affected by biological tree stress the year before. Along with a relatively stable oil extraction rate, its crude palm oil (CPO) yield stood at 4.8 MT per mature ha – comparable to that of large regional peers. The Group’s good track record of productivity continues to reflect well on its agronomic practices. Further, KLK’s lean cost structure will tide it over CPO price downcycles.
Despite a heavier debt load of RM2.82 billion as at end-March 2014 (end-September 2013: RM2.34 billion), KLK’s balance sheet stayed strong, with a gearing ratio of 0.33 times. Coupled with its typically hefty cash pile, KLK’s net gearing ratio was low at 0.16 times. KLK’s debt is expected to stay at around RM2 billion-RM2.50 billion over the next few years, as capex should be sufficiently covered by strong cashflow generation. We expect its credit metrics to remain solid, with gearing of less than 0.30 times, a funds from operations debt cover of above 0.60 times and operating cashflow debt cover of around 0.50 times over the same period. These figures are complemented by KLK’s strong liquidity and financial flexibility.
The ratings are, however, moderated by KLK’s large new downstream capacity which was commissioned this fiscal year, substantially boosting its downstream capacity from 1.6 million MT per annum previously to about 2.4 million MT. We remain cautious of the downstream sector’s vulnerability to high feedstock costs and overcapacity, which will pose a challenge to KLK in optimising the use of its existing and new capacities. These factors are partly mitigated by KLK’s integrated operations. In addition, the profitability of the Group’s manufacturing segment has improved in the last few quarters as a result of increased oleochemical sales, better utilisation rates and the timely purchases of lower-priced feedstock.
The ratings also take account of KLK’s susceptibility to volatile CPO prices, which affect all planters. The price of CPO, as a commodity, is subject to many factors including the supply and demand dynamics of CPO and other vegetable oils, as well as weather conditions. On this note, El Nino weather conditions, which led to a rally in CPO prices in 1H 2014, have been delayed, and their strength is likely to be lesser than earlier anticipated. Coupled with the fact that palms are entering the peak production season, CPO prices are expected to be lower in the 2H. We expect average CPO prices for 2014 to be around RM2,500-RM2,600 per MT. Further, with more than half of its planted land bank located in Indonesia, KLK is exposed to the more challenging operating environment in the republic. KLK’s new ventures in Papua New Guinea and Liberia also pose added risks and challenges.

Media contact
Karin Koh
(603) 7628 1174
karin@ram.com.my