Published on 13 Oct 2022.
RAM Ratings has reaffirmed the AA1/Stable ratings of Batu Kawan Berhad (the Group)’s RM500 mil Islamic Medium-Term Notes (IMTN) Programme (2013/2023) and RM1 bil IMTN Programme (2022/2043).
The reaffirmation of the ratings is supported by the Group’s strong business position as the third largest planter in Malaysia, its highly integrated and geographically diversified business, as well as its strong debt coverage metrics and liquidity. These factors are anticipated to buffer its weaker balance sheet over the next two years.
Batu Kawan’s financial performance and credit profile largely mirror that of its 47%-controlled subsidiary, Kuala Lumpur Kepong (KLK), which contributes more than 90% of the Group’s revenue and operating profit before depreciation, interest and tax (OPBDIT), respectively. Batu Kawan’s integrated plantation business is parked under KLK, the sukuk programmes of which are rated AA1/Stable by RAM.
The Group’s OPBDIT surged 72.7% in FY Sep 2021, aided by robust crude palm oil (CPO) prices which negated the impact of weaker production for the year (-2.0%). Apart from the plantation segment, both the oleochemical and industrial chemicals businesses under the manufacturing segment also registered favourable results in view of higher sales volumes and selling prices. In 9M FY Sep 2022, Batu Kawan continued to benefit from higher CPO prices, seeing its top line and OPBDIT leap a respective 44.8% and 68.5%. Profits from newly acquired businesses – KLK Sawit Nusantara Berhad (KSN, formerly known as IJM Plantation Berhad) (acquired in September 2021) and PT Pinang Witmas Sejati (October 2021) – also contributed to the improvements.
Heightened working capital needs, the sizeable KSN acquisition and debt consolidations pushed the Group’s net debt level to RM7.8 bil as at end-June 2022 (end-September 2020: RM2.9 bil), beyond our expectation. The higher-than-expected working capital of about RM2.8 bil from FY Sep 2021 to 9M FY Sep 2022, mainly for its mid- and downstream operation, was underpinned by strong CPO prices. As a result, gearing and net gearing weakened to 0.73 times and 0.48 times, respectively, as at end-June 2022, exceeding the rating thresholds. After the redemption of KLK’s RM1 bil sukuk which matured on 2 September 2022, the Group’s gearing should ease to around 0.67 times and will decline further after the repayment of Batu Kawan’s RM500 mil sukuk next year.
Current leverage levels leave no headroom for further debt expansion. We view the weakening of the Group’s balance sheet – although beyond our earlier expectations of FY Sep 2022 – to be temporary, with gearing expected to gradually return. It should hover within the threshold of 0.50 times in FY Sep 2024 after hefty capital expenditure eases, alongside improving retained earnings. Short-term debts incurred for working capital are likely to be repaid upon cash conversion and moderate in tandem with lower CPO prices.
Elevated gearing is balanced by the Group’s sturdy debt coverage metrics. Despite an enlarged debt load, its funds from operations (FFO) debt cover and FFO net debt cover stayed solid at a respective 0.35 times and 0.54 times in 9M FY Sep 2022 (9M FY Sep 2021: 0.35 times and 0.80 times), thanks to the higher CPO prices. Under our stressed CPO price assumptions of RM5,000/MT for 2022 and RM3,300/MT for 2023, gross and net debt coverage are expected to remain sturdy at over 0.30 times and 0.40 times, respectively, above the rating thresholds.
Batu Kawan’s issue ratings are also backed by healthy productivity metrics and a fairly lean cost structure. Moderating the ratings are the challenging operating environment of the Group’s midstream and downstream businesses and mounting scrutiny of environmental and social issues affecting palm oil players. Like other planters, KLK is susceptible to volatile CPO prices.
Wong Ee Loo
(603) 3385 2521
Thong Mun Wai
(603) 3385 2522
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Ratings on Batu Kawan Berhad