Published on 18 Dec 2020.
RAM Ratings has reaffirmed the AA1/Stable rating of Batu Kawan Berhad’s (Batu Kawan or the Group) RM500 mil Islamic Medium-Term Notes Programme (2013/2023). The reaffirmation reflects the Group’s ability to maintain a strong financial profile notwithstanding the COVID-19 pandemic. Despite demand disruption, crude palm oil (CPO) prices have remained high due to the implementation of the B30 biodiesel mandate in Indonesia and weaker production this year. The various stages of the Movement Control Order have had minimal impact on the Group’s plantation segment as it has been allowed to continue operating, although estates in Sabah have seen some disruptions.
Batu Kawan’s credit profile largely mirrors that of its 47%-controlled subsidiary, Kuala Lumpur Kepong Berhad (KLK), which contributes more than 90% of the Group’s revenue and operating profit before depreciation, interest and tax (OPBDIT). The Group’s integrated plantation business is parked under KLK, the sukuk programmes of which are rated AA1/Stable by RAM.
Stronger CPO prices averaging RM2,613/MT in 10M 2020 (2019: RM2,118/MT) had resulted in a better performance by Batu Kawan’s plantation segment. Notably, the Group’s OPBDIT and pre-tax profit were lifted 53% and 36%, respectively, in FY Sep 2019 and FY Sep 2020. The Group’s net gearing ratio and annualised funds from operations (FFO) net debt cover stayed robust in the same period at a respective 0.23 times and 0.61 times, underpinned by a sizeable cash pile (including liquid money-market instruments).
On 11 December 2020, Batu Kawan completed the acquisition of a 56.32% stake in Chemical Company of Malaysia Berhad (CCM). This makes Batu Kawan the sole chlor-alkali manufacturer in the country, which will strengthen the Group’s industrial chemical business. The acquisition has triggered a mandatory takeover offer (MTO) for the remaining shares in CCM. This entire acquisition will likely be funded by a combination of cash and borrowings. Should Batu Kawan be successful in taking CCM private, the Group’s net debt is expected to increase by RM716.73 mil, after factoring in CCM’s existing debts and assuming that the MTO would be fully debt funded. The financial impact of this purchase is manageable in view of Batu Kawan’s strong performance in FY Sep 2020 and its conservative balance sheet.
Under our base-case scenario, which assumes conservative CPO prices and the utilisation of the Group’s cash reserves to fund ongoing acquisitions, Batu Kawan’s FFO net debt cover is anticipated to stay supportive of its issue rating at above 0.40 times. We believe current lofty CPO prices relative to price assumptions in our stress analysis, coupled with synergistic benefits from the acquisition of the CCM stake, will provide some upside to the Group’s credit metrics.
The rating remains backed by Batu Kawan’s strong business profile. Through KLK, the Group is Malaysia’s third-largest plantation player and among the world’s top 10. Its integrated business model provides some natural hedge against CPO price downcycles. Batu Kawan’s operations are geographically dispersed throughout Malaysia, Indonesia, Liberia, Europe and China. The Group’s healthy agronomic practices have led to strong yields that compare favourably to that of large regional peers. Additionally, the fairly lean cost structure of its upstream segment will continue to serve it well during industry downcycles.
The rating is constrained by the challenging operating environment of the Group’s mid- and downstream businesses, which continue to be plagued by persistent overcapacity and volatile feedstock costs. As with other planters, Batu Kawan is susceptible to the volatility of CPO prices and mounting pressure from labour and environmental issues. Apart from the tougher operating environment in Indonesia, the Group’s Liberian venture also poses challenges and risks, as demonstrated by the closure of its Butaw estate in July 2019.
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Ratings on Batu Kawan Berhad