Published on 15 Sep 2020.
RAM Ratings has reaffirmed the ratings of Kuala Lumpur Kepong Berhad (KLK or the Group), as follows:
RM2.0 bil IMTN Programme (2019/2039)
RM1.6 bil Multi-Currency IMTN Programme (2015/2027)
RM1.0 bil Multi-Currency IMTN Programme (2012/2022)
Global Corporate Credit Ratings
The reaffirmation of the ratings is premised on KLK’s ability to maintain a strong financial profile despite challenging operating conditions. Notwithstanding demand disruption arising from the COVID-19 pandemic, CPO prices have remained high due to the implementation of the B30 mandate in Indonesia and weaker production this year. The various stages of the Movement Control Order have had minimal impact on KLK’s plantation segment as it has been allowed to keep operating in spite of a brief disruption in Sabah.
In FY Sep 2019, the Group’s revenue and OPBDIT fell a respective 16% and 9%. This was below our expectations due to soft CPO prices despite stronger upstream productivity (FFB output rose 4%). The RM145.3 mil impairment of its Butaw estate in Liberia had also led to a 17% drop in the Group’s bottom line to RM 823.9 mil. In 9M FY Sep 2020, KLK’s operating profit before depreciation, interest and tax (OPBDIT) surged 51% y-o-y, fuelled by the better showing of its plantation segment, the profit of which more than doubled from healthier CPO prices. At the same time, the Group’s annualised net gearing ratio and funds from operations (FFO) net debt cover remained robust at a respective 0.23 and 0.59 times, underpinned by its sizeable cash pile (including liquid money-market instruments).
Under the base-case scenario, which assumes conservative CPO prices and the utilisation of KLK’s cash reserves to fund its recent acquisitions, the Group’s net gearing ratio may weaken temporarily beyond its rating threshold. However, its FFO net debt cover is anticipated to stay above 0.40 times, thereby supporting its ratings. Given the lofty CPO prices currently relative to our price assumptions, we believe there is room for improvement in KLK’s credit metrics in the near term.
Meanwhile, the ratings remain supported by KLK’s strong market position as Malaysia’s third largest plantation company and among the world’s top ten. Its integrated business model provides some degree of natural hedge in buffering against CPO price downcycles. In addition, the Group’s operations are geographically dispersed throughout Malaysia, Indonesia, Liberia, Europe and China. Its favourable tree maturity profile and ongoing mechanisation programme are anticipated to improve upstream yields and moderate costs.
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 prices. As with other planters, KLK is also susceptible to volatile CPO prices. Apart from the tougher operating environment in Indonesia, the Group also faces challenges and risks from its Liberian venture, as demonstrated by the closure of Butaw estate in July 2019.
Wong Ee Loo
(603) 3385 2521
(603) 3385 2577
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 2020 by RAM Rating Services Berhad
Ratings on Kuala Lumpur Kepong Berhad