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RAM Ratings assigns AA1 rating to KLK’s proposed IMTN

Published on 28 Jan 2022.

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RAM Ratings has assigned an AA1/Stable rating to Kuala Lumpur Kepong Berhad’s (KLK or the Group) proposed 30-year Islamic Medium-Term Notes (IMTN) Programme of up to RM2.0 bil. The ratings of KLK’s other debt programmes (listed below) were reaffirmed during our review in September 2021. 

Proceeds of the proposed sukuk will be utilised for shariah-compliant general corporate purposes including future acquisitions, investment, capital expenditure, working capital requirements and the refinancing of existing borrowings. The initial issuance from the programme will refinance the Group’s RM1.0 bil of sukuk maturing in September 2022.

Instrument

Rating Action

Rating(s)

Proposed 30-year IMTN Programme of up to RM2.0 bil

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

Assigned

Reaffirmed

Reaffirmed

Reaffirmed

Reaffirmed

AA1/Stable

AA1/Stable

AA1/Stable

AA1/Stable

gA3/Stable/gP2

 

We expect the Group’s credit fundamentals to remain supportive of the ratings over the next few years. KLK’s solid market position as the third largest planter locally and among the top 10 worldwide is underlined by its vast and geographically diversified oil palm plantations. Its highly integrated business model provides a certain extent of natural hedge against crude palm oil (CPO) price downcycles. The ratings are also backed by healthy productivity metrics and a fairly lean cost structure. The challenging operating environment of the Group’s midstream and downstream businesses as well as mounting scrutiny of environment and social issues are moderating factors.

Current CPO prices are robust, averaging RM4,418/MT in 2021. We expect prices to ease from these lofty levels but stay above historical averages (2016-2020 average: RM2,510/MT), buoyed by a slowdown in new plantings in Indonesia and Malaysia. Rising consumption as economies recover from the pandemic and CPO’s current steep discount to soybean oil also support a higher floor price for CPO. The soybean oil price has itself doubled in the past year due to tight supply caused by weather-related disruptions and its increased use in the production of renewable diesel, also known as hydrotreated vegetable oil.

On 6 September 2021, KLK acquired 56.2% of IJM Plantation Berhad (IJMP), triggering a mandatory general offer (MGO) for the remaining listed shares. Subsequent to the MGO, KLK owns 95.0% of IJMP as at end-December 2021. The latter was delisted in November 2021. The acquisition, together with the purchase of a 60% stake in PT Pinang Witmas Sejati which was completed on 1 October 2021, increased the Group’s total oil palm planted area by 35% to 289,135 ha, in line with its strategy to expand through brownfield acquisitions.

In FY Sep 2021, KLK’s revenue and operating profit before depreciation, interest and tax (OPBDIT) surged 28.3% and 71.2%, respectively, to RM19.8 bil and RM2.6 mil (FY Sep 2020: RM15.4 bil and RM1.5 mil). All its business segments (plantation, manufacturing and property) demonstrated stronger performances. As IJMP was acquired only in September 2021, the full effects of its contribution will kick in from FY Sep 2022 onwards.

As at end-September 2021, the Group’s gross and net gearing ratio weakened to 0.63 times and 0.38 times, respectively (end-September 2020: 0.56 times and 0.23 times) after the drawdown of borrowings to purchase the IJMP stake and debt consolidation. While the ratios exceeded the threshold for the ratings due to the earlier than expected completion of the acquisition, we expect still robust CPO prices to boost retained earnings. Gross gearing is envisaged to retreat below the benchmark of 0.50 times in the near term, even under RAM’s conservative CPO price assumptions of RM3,000/MT for 2022 and RM2,800/MT for 2023. Higher profitability, backed by strong CPO prices, kept KLK’s funds from operations (FFO) debt cover and FFO net debt cover sturdy at a respective 0.31 times and 0.51 times in FY Sep 2021 (FY Sep 2020: 0.25 times and 0.61 times). 

 

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 2022 by RAM Rating Services Berhad



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