RAM places KLK and Batu Kawan’s ratings on negative rating watch

Published on 01 Sep 2023.

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RAM Ratings has placed the issue ratings of Kuala Lumpur Kepong Berhad’s (KLK) and Batu Kawan Berhad’s sukuk programmes, on Rating Watch with a negative outlook. The credit profiles of both companies are closely linked given that KLK accounts for almost 90% of Batu Kawan’s consolidated earnings.

The rating action follows KLK’s recent announcement of the strategic collaboration agreement with Boustead Holdings Berhad (BHB) and Lembaga Tabung Angkatan Tentera (LTAT). It will involve the:

1. proposed acquisition of 33% and 1 share in Boustead Plantations Berhad (BPlant) for RM1.15 bil (RM1.55 per share);
2. proposed mandatory take-over offer to acquire all the remaining BPlant shares not already owned by KLK, BHB and LTAT (collectively, Joint Offerors) at the cash offer price of RM1.55 per share; and
3. enhancing the operational efficiencies and crude palm oil yields of the plantations of BPlant over the long term.

If the proposed acquisition and full acceptance of the mandatory take-over materialise, KLK will own 65% of BPlant with the remaining 35% held by BHB and LTAT. An estimated RM2.25 bil will be required to complete the transactions, of which RM2.03 bil will be funded via borrowings. After including the RM856.9 mil debts at BPlant as at end-2022, KLK’s financial metrics is expected to deteriorate, reflecting the significant increase in its debt levels by about RM2.88 bil. KLK’s gearing ratio is projected to increase to around 0.7 times as at end-FY Sep 2024 (end-FY Sep 2022: 0.6 times), with a corresponding decline in its funds from operations debt coverage to around 0.2 times (end-FY Sep 2022: 0.38 times).

RAM recognises that the strategic collaboration agreement will strengthen KLK’s already strong position in upstream plantations. BPlant has 97,399 hectares of land, of which 74.2% are planted with oil palm. These planted areas are in Sabah (38,670 hectares), Peninsular Malaysia (23,336 hectares) and Sarawak (10,285 hectares). BPlant’s planted acreage will complement KLK’s existing operations in Peninsular Malaysia and Sabah quite well. They will also enlarge the KLK’s planted area by 25%, to 361,941 ha. Since 1986, KLK and BHB have been equal partners in Applied Agricultural Resources Sdn Bhd (ARR), a joint venture company principally involved in agronomic advisory and research services as well as the commercial production of oil palm seeds and planting materials. This long working relationship with AAR gives KLK unique insights on BPlant’s estates, which will be crucial to support yield positive returns through improvement initiatives and asset rebalancing strategy to reduce the acreage of trees older trees.

We expect the Rating Watch to be resolved on the completion of the corporate exercises, which will likely be by December 2023, and when we have evaluated KLK's integration strategy regarding BPlant as well as their deleveraging plans. In the meantime, we have commenced our annual rating review on KLK and Batu Kawan’s ratings which we expect to conclude in the next two months.

RAM’s Rating Watch highlights a possible change in an entity’s rating. It focuses on identifiable events such as mergers, acquisitions, regulatory changes and operational developments that place a rated entity under RAM’s special surveillance. In a broader sense, the Rating Watch covers any event that may result in changes in risk factors relating to the capacity of an entity to meet its financial obligations.

Entities are put on Rating Watch when some of the abovesaid events are expected to or have occurred. The Rating Watch, however, does not mean that the rating will inevitably be changed. It only means that RAM is evaluating the rating and a final affirmation is pending. A ”positive” outlook indicates that a rating may be raised while a "negative" outlook indicates a possible downgrade. A “developing” outlook refers to unusual situations in which future events are so unclear that the rating may potentially be raised or lowered.

 

Analytical contacts
Thong Mun Wai
(603) 3385 2522
munwai@ram.com.my

Wong Ee Loo
(603) 3385 2521
eeloo@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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