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RAM Ratings reaffirms KLK’s ratings
Published on 13 Oct 2022.
RAM Ratings has reaffirmed Kuala Lumpur Kepong Berhad’s (KLK or the Group) ratings as follows:
|
Instrument |
Rating(s) |
|
RM2.0 bil IMTN Programme (2022/2052) RM2.0 bil IMTN Programme (2019/2039) RM1.6 bil Multi-Currency IMTN Programme (2015/2027) Global Corporate Credit Ratings |
AA1/Stable AA1/Stable AA1/Stable gA3/Stable/gP2 |
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 KLK’s weakened balance sheet over the next two years.
Operating profit before depreciation, interest and tax (OPBDIT) surged 71.2% in FY Sep 2021, driven by the Group’s plantation and oleochemical segments. Robust crude palm oil (CPO) prices negated the impact of weaker production during the year (-2.0%). In 9M FY Sep 2022, KLK continued to benefit from higher CPO prices, seeing its top line and OPBDIT leap a respective 45.1% and 66.4%. 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 better showing.
Heightened working capital needs, the sizeable KSN acquisition and debt consolidations pushed the Group’s net debt level to RM7.3 bil as at end-June 2022 (end-September 2020: RM2.7 bil), beyond our expectation. The higher than expected working capital of about RM2.7 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 0.70 times and 0.48 times, respectively, as at end-June 2022, exceeding the rating thresholds. As KLK has fully redeemed the RM1.0 bil sukuk which matured on 2 September 2022, its gearing ratio is estimated to have eased to around 0.64 times.
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.
The elevated gearing is balanced by KLK’s sturdy debt coverage metrics. Despite an enlarged debt load, the Group’s funds from operations (FFO) debt cover and FFO net debt cover stayed solid at a respective 0.36 times and 0.52 times in 9M FY Sep 2022 (9M FY Sep 2021: 0.37 times and 0.93 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, we expect its gross and net debt coverage metrics to remain sturdy at over 0.30 times and 0.40 times, respectively, above the rating thresholds.
The ratings are also backed by healthy productivity metrics that compare favourably to regional peers’. The fairly lean cost structure of KLK’s upstream segment will continue to adequately buffer against industry downcycles. Moderating the ratings are the challenging operating environment of the midstream and downstream businesses and mounting scrutiny of environment and social issues affecting palm oil players. Like other planters, KLK is susceptible to volatile CPO prices.
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
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