Published on 11 Mar 2022.
RAM Ratings has assigned corporate credit ratings of AAA/Stable/P1 to Johor Corporation (JCorp or the Group). Concurrently, we have assigned an AAA/Stable rating to its Proposed RM3.5 billion Islamic Medium-Term Notes Programme (Proposed IMTN). Proceeds will be used to refinance existing borrowings (including RM1.8 bil of sukuk maturing in June 2022) as well as fund future working capital requirements and business expansion.
The rating is premised on JCorp’s strategic role as the state economic development corporation of Johor. As the flagship vehicle spearheading Johor’s industrial development, JCorp is mandated to undertake catalytic projects that drive the state’s economic growth. Since its inception, JCorp has developed 34 industrial zones in the state. Prominent industrial developments include Pasir Gudang Industrial Park, the Tanjung Langsat Industrial Complex, Tebrau Industrial Area and, more recently, Pengerang Industrial Park and Muar Furniture Park.
Given JCorp’s strategic role as an economic enabler for the state of Johor, we see state government support to be strong. This has been demonstrated via various funding support including the extension of guarantees and letters of undertaking for the Group’s borrowings. JCorp has also been granted beneficial ownership of land earmarked for industrial development in Johor. Returns from land sales have been used to fund JCorp’s operations.
JCorp is one of the few state agencies that benefit from government-guaranteed borrowings. Its unrated RM3 bil Sukuk Wakalah Programme (RM1.8 bil outstanding), set up in 2012, is guaranteed by the federal government. To date, JCorp has met all its repayment obligations in a timely manner. In January 2022, JCorp received Ministry of Finance approval to raise up to RM3.5 bil of borrowings, with the option to have these guaranteed by the Johor state government. A separate sukuk programme for the purpose of state-guaranteed issuances may be established at a later stage. This and the Proposed IMTN will have a combined issuance limit of RM3.5 bil.
JCorp’s business risk profile gains from the leading market positions and strong cashflow generating ability of its investments in the food & restaurant and healthcare sectors under QSR Brands (M) Holdings Bhd (QSR) and KPJ Healthcare Berhad (KPJ). As at end-September 2021, the value of JCorp’s shareholdings in QSR and KPJ were estimated at RM3.1 bil and RM1.8 bil, respectively. These sums collectively accounted for 80% of the realisable net asset value (RNAV) of the Group’s portfolio.
Kulim (Malaysia) Berhad (Kulim) has generally been JCorp’s largest dividend contributor, generating 39%-69% of total dividend income. Aided by strong crude palm oil prices, Kulim returned to the black in 9M FY Dec 2021 after two consecutive years of losses caused by significant losses and impairments on overseas ventures and oil and gas-related operations. Under a new leadership since early 2020, JCorp has restructured and rationalised its business activities into four core businesses (agribusiness, wellness & healthcare, food & restaurant, and real estate & infrastructure) and will gradually exit underperforming businesses.
JCorp’s company-level financial profile, however, moderates these strengths. Its balance sheet is suppressed by hefty borrowings of RM3.4 bil as at end-September 2021 and high yearly finance costs of around RM120 mil-130 mil. Gearing was 1.51 times while the ratio of net debts to RNAV was 0.57 times. Backed by land sales and dividend receipts (mostly from Kulim, KPJ and property arm Johor Land Berhad), JCorp’s interest coverage is volatile, fluctuating between 0.8 times and 3.0 times in the last few years and should average around 2 times going forward. We expect gearing to improve to about 1.2 times following debt repayments with proceeds from asset disposals.
JCorp’s consolidated financial profile is weighed down by its gearing and cashflow debt coverage of around 1 time and 0.1 times, respectively, in the last few years. Potential acquisition, divestment and monetisation activities from JCorp’s renewed focus on value creation and capital appreciation casts some uncertainty over how its financial profile will evolve in the medium term. That said, initiatives to exit non-core segments and the management’s greater emphasis on prudent financial management should limit downside risks for its credit metrics.
As at end-September 2021, company-level cash reserves amounted to only RM102 mil against RM3.1 bil of short-term debts. We expect JCorp’s near-term maturities to be refinanced by issuances from the Proposed IMTN. Its financial flexibility offsets tight company-level liquidity to some extent. JCorp’s plans to refinance existing bank borrowings with sukuk issuances will allow the Group to unlock an estimated RM1.5 bil of assets (mostly shares of KPJ) that are currently pledged against the borrowings. The Group also has easy access to capital markets and should be able to avail on funding support from the state government.
(603) 3385 2509
Thong Mun Wai
(603) 3385 2522
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Ratings on Johor Corporation