Published on 02 Sep 2021.
RAM Ratings has assigned an AA1/Stable rating to Batu Kawan Berhad’s (the Group) proposed Islamic Medium-Term Notes (IMTN) Programme of up to RM1.0 bil and reaffirmed the same rating of the Group’s RM500 mil IMTN Programme (2013/2023).
The rating reflects Batu Kawan’s robust financial performance on the back of bullish crude palm oil (CPO) prices since our last review. The current prices averaged at RM4,062/MT in 7M 2021 are much higher than our previous expectation of RM2,400-RM2,600/MT. Given that prices are envisaged to stay above RM3,000/MT due to tight global supply conditions for edible oils, we expect the Group’s credit metrics to remain solid even after the acquisition of IJM Plantations Berhad (IJMP) by its 47%-controlled subsidiary, Kuala Lumpur Kepong Berhad (KLK).
Batu Kawan’s financial performance and credit profile largely mirror those of KLK which contributes more than 90% and 80% 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.
We view the proposed acquisition of IJMP as a positive development operationally as it will increase the scale of KLK’s plantation business and allow the latter to benefit from the strong growth potential of IJMP’s palms, the bulk of which are in the prime phase (70% of planted area). The acquisition of the 56.2% stake in IJMP from IJM Corporation Berhad will cost RM1.5 bil or RM3.10 per IJMP share. The full acquisition price will rise to RM2.7 bil in the event that the mandatory general offer is accepted in full. Backed by the Group’s strong cashflow generation amid high CPO prices and its conservative balance sheet, the financial impact of the acquisition is deemed manageable.
We expect Batu Kawan’s gearing to hover around the threshold of 0.50 times this year and next before improving to about 0.45 times in FY Sep 2023. Buoyed by anticipated higher earnings, funds from operations (FFO) debt coverage will stay strong at above 0.30 times over the same period. Substantial cash depletion is likely to elevate the Group’s net gearing to about 0.40 times in the next two years but FFO net debt coverage is expected to remain solid at above 0.40 times.
Batu Kawan’s OPBDIT climbed 20.0% y-o-y in FY Sep 2020. The plantation business’ (+82.5%) much stronger earnings had offset the slightly weaker performance of the manufacturing segment (-4.0%). The poorer showing of this segment was largely attributable to the industrial chemical business which was affected by the slowdown in industrial activity during the pandemic. In 9M FY Sep 2021, the Group’s top line and OPBDIT jumped a respective 22.1% and 56.3%, supported by a better performance across all business segments.
As at end-June 2021, Batu Kawan’s debt burden grew 9.3% to RM7.90 bil (end-June 2020: RM7.22 bil). The additional borrowings were used to cater to its increased working capital requirement of its manufacturing segment amid loftier feedstock prices and to partly fund the acquisition of a 100%-stake in Chemical Company of Malaysia Berhad (CCM) for RM519.4 mil in early 2021. Stronger retained earnings have kept the Group’s gearing fairly stable at 0.55 times (end-June 2020: 0.57 times). As a result of a better than expected profit performance, Batu Kawan’s annualised FFO debt coverage improved to 0.35 times in 9M FY Sep 2021 (9M FY Sep 2020: 0.23 times).
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 operations are geographically dispersed throughout Malaysia, Indonesia, Liberia, Europe and China. The Group’s integrated business model to some extent provides a natural hedge against CPO price downcycles. Supported by strong agronomic practices, the Group maintains healthy productivity metrics which compare favourably to that of large regional peers. The fairly lean cost structure of its upstream segment will continue to provide ample buffer against industry downcycles. Apart from palm oil operations, Batu Kawan is the sole chlor-alkali producer in Malaysia.
The rating is constrained by the challenging operating environment of the Group’s mid- and downstream business (refining and oleochemicals), which is still plagued by overcapacity and volatile feedstock costs. As with other planters, Batu Kawan is susceptible to the volatility of CPO prices and mounting pressure stemming from labour and environmental issues. The Group also faces a tougher operating environment in Indonesia and added risks associated with its venture in Liberia.
Wong Ee Loo
(603) 3385 2521
Thong Mun Wai
(603) 3385 2522
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Ratings on Batu Kawan Berhad