RAM Ratings has reaffirmed the rating of Batu Kawan Berhad’s (Batu Kawan) RM500.0 million IMTN Programme at AA1/Stable.

Published on 06 August 2014

RAM Ratings has reaffirmed the rating of Batu Kawan Berhad’s (Batu Kawan) RM500.0 million IMTN Programme at AA1/Stable. Batu Kawan is the largest manufacturer of chlor-alkali products and sulphuric acid in Malaysia. It is also involved in oil-palm and rubber cultivation and downstream resource-based manufacturing through 46.57%-owned Kuala Lumpur Kepong Berhad (KLK, and collectively the Group).
As Batu Kawan’s income is mainly derived from KLK, the ratings of the 2 entities are highly correlated. KLK has a longstanding track record within the upstream and downstream segments of the palm oil industry. It is the third-largest plantation company in Malaysia and among the top 10 globally, with a sizeable oil-palm planted area of 193,337 ha as at end-March 2014. KLK’s fresh fruit bunch yield improved to 22.51 MT/ha in FY Sep 2013 (FY Sep 2012: 21.33 MT/ha), a result of its Sabah estates recovering from tree stress faced the year before. Coupled with a relatively stable oil extraction rate (OER), its crude palm oil (CPO) yield stood at 4.8 MT/ha – comparable to that of large regional peers. KLK’s good agronomic practices are expected to support its healthy production track record. Additionally, KLK’s lean cost structure will enable it to weather CPO price downcycles.

The Group’s gearing level as at end-March 2014 stood at 0.37 times, slightly higher than end-March 2013’s 0.30 times, owing to a heavier debt load. Combined with its hefty cash pile, its net gearing ratio was low at 0.14 times. The Group is expected to maintain its debt level in the region of RM2 billion-RM3 billion over the next few years, as capex should be sufficiently covered by strong cashflow generation. Moving forward, we envisage the Group’s credit metrics remaining solid, with gearing of less than 0.30 times and a funds from operations debt cover of above 0.60 times. These figures will be further complemented by its strong liquidity and financial flexibility.
The ratings are, however, moderated by KLK’s large new downstream capacity which was commissioned this fiscal year, that substantially boosted its downstream capacity from 1.6 million MT per annum previously to about 2.4 million MT. The downstream sector is vulnerable to high feedstock costs and overcapacity, which will pose a challenge to KLK in optimising the use of its existing and new capacities. That said, we derive comfort from KLK’s integrated operations.
The ratings also take into consideration the Group’s exposure 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, the Group 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. Elsewhere, Batu Kawan is also susceptible to the volatile prices of the industry chemical products.

Media contact
Robert Ching
(603) 7628 1031
robertching@ram.com.my