MARC has affirmed its AAA(bg) rating on Boustead Holdings Berhad's (Boustead) RM1.0 billion Bank-Guaranteed Medium-Term Notes (BG MTN) programme with a stable outlook. The rating reflects the credit strength of the syndicated bank guarantee fa

MARC has affirmed its AAA(bg) rating on Boustead Holdings Berhad's (Boustead) RM1.0 billion Bank-Guaranteed Medium-Term Notes (BG MTN) programme with a stable outlook. The rating reflects the credit strength of the syndicated bank guarantee facility provided by OCBC Bank (Malaysia) Berhad (OCBC Malaysia), Public Bank Berhad (Public Bank), Malayan Banking Berhad (Maybank) and The Bank of East Asia (BEA) Labuan Branch, all of which carry financial institution ratings of AAA/Stable from MARC. The ratings on OCBC Malaysia and Public Bank are based on publicly available information. As at end-January 2017, the outstanding MTNs under the rated programme stood at RM600.0 million.

Boustead's standalone credit profile has benefitted from a moderate decline in borrowings from part-proceeds of the RM1.05 billion rights issue and a series of asset disposals. Total group borrowings declined to RM7.3 billion at end-September 2016 (9M2016) from RM8.0 billion at end-FY2015, resulting in lower leverage of 0.86 times from 1.09 times at 9M2015. MARC views positively Boustead's ongoing debt reduction efforts amid a tough operating environment for its key subsidiaries which are involved in plantation, property, heavy industries and pharmaceutical.

For unaudited 9M2016, Boustead's financial performance was primarily supported by asset monetisation in the plantation and property divisions, which provided RM316.1 million in disposal gains. On excluding disposal gains, the plantation and property divisions' pre-tax profits were RM77.2 million and RM41.0 million respectively (9M2015: RM88.7 million; RM31.2 million). During the period, fresh fruit bunch production fell by 14% y-o-y to 660,497 MT due to adverse weather conditions. The plantation division's performance was moderated by the improving palm product price environment, with the average selling price of crude palm oil (CPO) increasing by 15% y-o-y to RM2,475 per metric tonne as at end-9M2016. MARC opines that the plantation division's performance going forward would also be supported by the favourable maturity profile of Boustead's 65,366 ha plantation, of which 53% is of prime age.

Boustead's property development division has a limited number of ongoing projects; during 9M2016, it launched 403 units of mid-priced double-storey terrace houses in its Taman Mutiara Rini residential project in Johor. The division's RM3.0 billion mixed development project along Jalan Cochrane, Kuala Lumpur, comprising commercial and residential units and a shopping mall, has reached over 80% completion, and is expected to be completed by mid-2017.  As of end-November 2016, the take-up rate for the project is approximately 80%.

Its property investments comprising two retail malls in Mutiara Damansara, Selangor, four office buildings in the KLCC area, and one office tower in Penang recorded a strong average occupancy rate of 95%. However, a large portion of the rental cash flows from these assets will be channelled to meet financial obligations under the outstanding RM760.0 million asset-backed bonds which will mature in 2019. The group's hotel segment under the ''Royale'' brand has been registering lower average occupancy rates of about 52%.

Boustead's heavy industries division was adversely affected by high working capital requirements and cost overruns in ship construction and restoration projects. This led to a widening of the heavy industries division's pre-tax loss to RM133.9 million as at end-September 2016 (9M2015: negative RM31.6 million). The heavy industries division has sizeable outstanding government contracts of RM6.4 billion; its major contract involves building six combat ships; the first ship is expected to be delivered in 2019 while the physical construction of the second ship commenced in November 2016. The trading and industrial division, which is the major revenue contributor of the group, registered improved profitability; nonetheless, it is characterised by regulated margins under the automatic pricing mechanism for the retail petroleum business.

Boustead's pharmaceutical division, supported by a 10-year concession expiring in 2019, recorded a 25.2% y-o-y decrease in pre-tax profit to RM52.9 million in 9M2016 due largely to higher selling and distribution costs as well as an increase in finance cost. Given the limited potential for expansion domestically, Boustead may continue to seek opportunities to grow in the foreign markets.

MARC notes that Boustead's consolidated CFO as at end-September 2016 stood at a low RM91.9 million; however, its liquidity position remains strong as reflected by cash and cash equivalents of RM982.0 million, which includes the unutilised proceeds of RM400 million from the initial public offering (IPO) listing of its plantation subsidiary, as at end-September 2016. Boustead's outstanding maturing notes of RM600.0 million under the rated programme are due at end-November 2017 when the programme will expire. The maturing debt is likely to be met largely from external borrowings.

At the holding company level, dividends from subsidiaries and associate companies increased by 38.3% y-o-y to RM297.9 million in 2015, mainly as a result of higher contribution from the plantation division. Boustead has continued to adhere to its high dividend payout policy, although dividend payout declined to RM217.1 million in 2015 (2014: RM294.8 million).

Noteholders are insulated from any downside risks in relation to Boustead's credit profile by the irrevocable and unconditional bank guarantees provided by the consortium of banks.

Contacts:             Cheah Wan Kin, +603-2082 2232/ wankin@marc.com.my; Taufiq Kamal, +603-2082 2251/ taufiq@marc.com.my

February 24, 2017