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RAM Ratings assigns AA1 rating to KLK’s proposed IMTN, reaffirms gA3/gP2 global-scale ratings and national-scale issue ratings

Published on 22 Aug 2019.

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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:

Rating Type/Instrument

Rating Action

Rating(s)

Issue Rating - RM1.6 bil Multi-Currency IMTN Programme (2015/2027)

Reaffirmed

AA1/Stable

Issue Rating - RM1.0 bil Multi-Currency IMTN Programme (2012/2022)

Reaffirmed

AA1/Stable

Global Corporate Credit Ratings

Reaffirmed

gA3/Stable/gP2

 

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.

 

Analytical contact
Karin Koh, CFA
(603) 3385 2508
Karin@ram.com.my

Media contact
Padthma Subbiah
(603) 3385 2577
padthma@ram.com.my

 

The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.

RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.

Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.

Published by RAM Rating Services Berhad
© Copyright 2019 by RAM Rating Services Berhad



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