RAM Ratings has assigned an AA1/Stable rating to Kuala Lumpur Kepong Berhad’s (KLK or the Group) proposed Multi-Currency IMTN Programme of up to RM1.6 billion (2015/2027).

Published on 13 April 2015

 We have also reaffirmed the following ratings:

Instruments/Rating Types	Rating Action	Ratings
Issue Ratings – RM300 million Sukuk Ijarah CP/MTN Programme (2011/2016)	Reaffirmed	AA1/Stable/P1
Issue Ratings – Multi-Currency IMTN Programme of up to RM1.0 billion (2012/2022)	Reaffirmed	AA1/Stable
Corporate Credit Ratings on the Global Scale	Reaffirmed	gA3/Stable/gP2

The reaffirmation of the ratings is premised on KLK’s favourable crop yields, efficient cost structure and solid balance sheet. Although KLK’s credit metrics were weaker than anticipated in FY Sep 2014 due to the softer prices of crude palm oil (CPO) compared to our assumptions and higher-than-expected debt, they are still supportive of the current ratings.
KLK has retained a strong market position as an integrated and geographically-diversified plantation company. Spread almost equally between Malaysia and Indonesia, its sizeable 200,597-hectare (ha) oil palm planted area makes it the third-largest planter locally and among the top 10 globally. It also has an established downstream presence in the 2 countries as well as Europe and China.
KLK’s fresh fruit bunch yields inched lower to 22.39 metric tonnes (MT) per ha in FY Sep 2014 (FY Sep 2013: 22.51MT/ha) due to dry weather in early 2014 and dilution from younger estates coming into maturity. Nevertheless, stricter harvesting standards and the usage of more productive tissue-culture techniques pushed its oil extraction rates up from 21.46% to 22%. Overall CPO yields climbed from 4.83MT/ha to 4.93MT/ha, stacking KLK favourably against large regional peers; this is expected to remain so in view of the Group’s strong plantation management. KLK’s more robust palm output, stronger CPO prices and a lower fertiliser cost underpinned a 19% y-o-y growth in its operating profit before depreciation, interest and tax.
The Group’s debt increased 25% y-o-y to RM2.91 billion as at end-September 2014 – more than we had anticipated due to substantial working capital needs for its enlarged downstream operations. The heftier working capital also shrank KLK’s operating cashflow. Nonetheless, its credit metrics stayed solid, with funds from operations debt cover (FFODC), gearing and net gearing ratios of 0.48 times, 0.37 times and 0.21 times, respectively. Considering the weaker CPO prices and KLK’s larger debt load, we expect its gearing ratio and FFODC to hover at a respective 0.30 times and 0.40-0.50 times going forward (compared to less than 0.30 times and above 0.60 times last year). These metrics are still supportive of its current ratings.
The ratings are moderated by KLK’s increased exposure to the challenging refining and oleochemical sectors. KLK’s refining and downstream capacity leapt a respective 56% and 33% y-o-y to 1.2 million MT/year and 2.4 million MT/year in FY Sep 2014. These sectors remain plagued by overcapacity and volatility in feedstock costs, which are unlikely to abate in the near term, rendering KLK’s mid- and downstream operations challenging. KLK is also susceptible to volatile CPO prices. We expect the ample supply of vegetable oils and weak crude oil prices to keep a lid on CPO prices this year, at an average of RM2,200-RM2,400/MT. Further, the Group is exposed to the more challenging operating environment in Indonesia, while its new ventures in Liberia and Papua New Guinea pose added risks. We expect KLK to stay resilient to some of these challenges, given its lean cost structure and solid balance sheet.

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