Published on 22 Aug 2019.
RAM Ratings has assigned an AA1/stable rating to Kuala Lumpur Kepong Berhad’s (KLK or the Group) proposed Islamic MTN (IMTN) Programme of up to RM2.0 bil. Concurrently, we have reaffirmed the following ratings:
Issue Rating - RM1.6 bil Multi-Currency IMTN Programme (2015/2027)
Issue Rating - RM1.0 bil Multi-Currency IMTN Programme (2012/2022)
Global Corporate Credit Ratings
The reaffirmed ratings reflect KLK’s ability to maintain a strong financial profile despite the current industry downcycle. We expect the Group to remain resilient through cyclical challenges, underpinned by its fairly lean cost structure and sturdy balance sheet.
The Group’s revenue and operating profit before depreciation, interest and tax (OPBDIT) fell a respective 12% and 22% in fiscal 2018 amid weaker-than-expected CPO prices. This had offset its stronger upstream productivity and healthier manufacturing profit arising from cheaper raw materials and stronger sales volumes. Persistently weak CPO prices had pushed its revenue and OPBDIT down a respective 18% and 40% y-o-y in 9M fiscal 2019. Given its weaker profitability, its annualised funds from operations (FFO) debt cover thinned to 0.30 times in 9M FY Sep 2019 (9M FY Sep 2018: 0.37 times), although still deemed commendable.
KLK’s gearing ratio had eased slightly to 0.35 times as at end-June 2019 (end-June 2018: 0.37 times). The Group’s debt level was lower than anticipated, having descended 8% as softer CPO prices had reduced the working capital requirements of its downstream segment. KLK’s lighter debt load and sizeable cash pile (including liquid money-market instruments) kept its net gearing ratio at a low 0.24 times (end-June 2018: 0.22 times). Going forward, we expect its gearing and FFO debt coverage ratios to hover around 0.4 and 0.3 times, respectively – still commensurate with its ratings. Most of its capex needs over the next couple of years are anticipated to be covered by its operating cashflow. The Group is, however, always seeking expansion opportunities, the outcome of which will have to be reassessed as and when they materialise.
Meanwhile, the ratings remain supported by KLK’s strong market position as Malaysia’s third largest plantation company and among the world’s top 10. Its integrated business model provides some degree of natural hedge in buffering against CPO price downcycles – as demonstrated in fiscal 2018. Its operations are geographically dispersed throughout Malaysia, Indonesia, Liberia, Europe and China. The Group’s strong agronomic practices have led to favourable yields that compare well with those of its large regional peers. Additionally, the fairly lean cost structure of its upstream segment will keep serving it well during industry downcycles.
On the other hand, the ratings are constrained by the challenging operating environment of the Group’s enlarged mid- and downstream businesses, which remain plagued by persistent overcapacity and volatile feedstock costs. As with other planters, KLK is susceptible to volatile CPO prices and mounting pressure from environmental issues. In addition, the Group faces a tougher operating environment in Indonesia plus added risks associated with its venture in Liberia. In 3Q FY Sep 2019, KLK has made a RM145 mil impairment in relation to its investment in the Butaw estate in Liberia after having determined that the remaining plantable area upon fulfilling the high carbon stock and high conservation value assessments is no longer economically feasible.
Karin Koh, CFA
(603) 3385 2508
(603) 3385 2577
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Ratings on Kuala Lumpur Kepong Berhad