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Credit metrics intact even after the proposed IJMP acquisition; RAM Ratings reaffirms KLK’s ratings

Published on 02 Sep 2021.

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RAM Ratings has reaffirmed Kuala Lumpur Kepong Berhad’s (KLK or the Group) ratings as follow:

 

The reaffirmations are premised on the Group’s strong 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. With prices envisaged to stay above RM3,000/MT due to tight global demand-supply conditions for edible oils, we expect the Group’s credit metrics to remain sound even after the acquisition of IJM Plantations Berhad (IJMP). The acquisition is anticipated to take place in FY Sep 2022. 
 
We view the proposed acquisition as a positive development operationally as it will increase the scale of KLK’s plantation business and allow the Group to gain 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 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 if the mandatory general offer is accepted in full. This sum will be largely financed by internal funds. Backed by the Group’s strong cashflow generation and conservative balance sheet, the financial impact of the acquisition is deemed manageable. 

KLK’s gearing and funds from operations (FFO) debt coverage are projected to come in below 0.50 times and above 0.30 times, respectively, up to FY Sep 2023 – within the thresholds set. Significant 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.

Operating profit before depreciation, interest and tax (OPBDIT) surged 25.2% y-o-y in FY Sep 2020, the better showing is mainly driven by the Group’s plantation segment. The impact of weaker production during the year (-4.0%) was negated by buoyant CPO prices. The manufacturing and property businesses also posted earnings growth despite lower revenue, in view of improved operational efficiencies and better sales of higher margin products. In 9M FY Sep 2021, KLK’s overall top line and OPBDIT jumped a respective 20.7% and 53.0%, backed by improved profitability across all business segments. 

As at end-June 2021, the Group’s debt load grew 4.5% y-o-y to RM7.04 bil (end-June 2020: RM6.74 bil). The additional short-term debt was catered to the manufacturing segment’s larger working capital requirement amid higher feedstock prices. Supported by stronger retained earnings and additional shares issued via a dividend reinvestment plan, the Group’s gearing eased to 0.52 times as at end-June 2021 (end-June 2020: 0.57 times). As a result of a better than expected profit performance, KLK’s annualised FFO debt cover improved to 0.37 times in 9M FY Sep 2021 (9M FY Sep 2020: 0.23 times).

The ratings remain backed by KLK’s sturdy market position as the third-largest plantation company locally and among the top 10 worldwide. 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 adequately buffer against industry downcycles. 

The ratings are however, constrained by the challenging operating environment of the Group’s mid- and downstream business, which is still plagued by overcapacity and volatile feedstock costs. As with other planters, KLK 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.

 

Analytical contacts
Wong Ee Loo
(603) 3385 2521
eeloo@ram.com.my

Thong Mun Wai
(603) 3385 2522
munwai@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 2021 by RAM Rating Services Berhad



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