Published on 26 Sep 2019.
RAM Ratings has reaffirmed the AA1/Stable rating of Batu Kawan Berhad’s (Batu Kawan or the Group) RM500 mil Islamic MTN Programme (2013/2023). The reaffirmation reflects the Group’s ability to maintain a strong financial profile despite the industry downcycle. It is also premised on our belief that it will remain resilient through cyclical challenges, underpinned by its fairly lean cost structure and sturdy balance sheet.
Batu Kawan’s credit profile largely mirrors that of its 47%-controlled subsidiary, Kuala Lumpur Kepong Berhad (KLK), which contributes more than 90% and 85% of the Group’s revenue and operating profit before depreciation, interest and tax (OPBDIT), respectively. The Group’s integrated plantation business is parked under KLK, the sukuk programmes of which are rated AA1/Stable by RAM.
In fiscal 2018, the Group’s OPBDIT fell 20% as weaker-than-expected CPO prices had offset its stronger upstream productivity as well as the healthier profits from manufacturing and industrial chemicals. Persistently weak CPO prices had pushed its OPBDIT down 38% y-o-y in 9M fiscal 2019. Given its weaker profitability, Batu Kawan’s annualised funds from operations debt cover (FFODC) thinned to 0.30 times (9M FY Sep 2018: 0.38 times), although still deemed supportive of its rating.
On a lighter note, the Group’s debt level was lower than expected (-7% y-o-y) as softer CPO prices had reduced the working capital requirements of its downstream segment. The Group’s gearing ratio had eased slightly to 0.37 times as at end-June 2019 (end-June 2018: 0.39 times) while its sizeable cash pile (including liquid money-market instruments) kept its net gearing ratio at a low 0.22 times. Going forward, we expect Batu Kawan’s gearing ratio and FFODC to hover around 0.4 and 0.3 times, respectively. Most of its capex needs over the next couple of years are anticipated to be covered by its operating cashflow.
The issuance proceeds from KLK’s new RM2 bil IMTN Programme are envisaged to be retained as cash at this juncture, thereby keeping its net gearing level and net debt coverage intact. As the Group is always seeking expansion opportunities, however, the significance of such ventures will have to be reassessed as and when they materialise.
Meanwhile, the rating remains supported by Batu Kawan’s strong market position. Through KLK, the Group is Malaysia’s third largest plantation player and among the world’s top 10. Its integrated business model provides some degree of natural hedge against CPO price downcycles. 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. Apart from palm oil operations, Batu Kawan is also the leading chlor-alkali producer in Malaysia.
On the other hand, the rating is constrained by the challenging operating environment of the Group’s mid- and downstream businesses, which remain plagued by persistent overcapacity and volatile feedstock costs. As with other planters, Batu Kawan is susceptible to volatile CPO prices and mounting pressure from environmental issues. The Group also faces a tougher operating environment in Indonesia plus added risks associated with its venture in Liberia. In 3Q FY Sep 2019, KLK recorded a RM145 mil impairment in relation to its investment in the Butaw estate in Liberia. This followed its conclusion that the remaining plantable area upon fulfilling the high carbon stock and high conservation value assessments was no longer economically feasible.
Karin Koh, CFA
(603) 3385 2508
(603) 3385 2577
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Ratings on Batu Kawan Berhad