Published on 06 Oct 2023.
RAM Ratings has removed the issue ratings of Kuala Lumpur Kepong Berhad’s (KLK) and Batu Kawan Berhad’s sukuk programmes from Negative Rating Watch, reinstating the outlook on the ratings to stable and concurrently reaffirming their long-term issue ratings at AA1. The credit profiles of both companies are closely linked, given that KLK accounts for almost 90% of Batu Kawan’s consolidated earnings.
The removal of the Negative Rating Watch follows the termination of KLK’s strategic collaboration agreement with Boustead Holdings Berhad (BHB) and Lembaga Tabung Angkatan Tentera (LTAT). Had the agreement materialised, KLK would own 65% of Boustead Plantations Berhad (BPlant) while the remaining 35% would be held by BHB and LTAT. The ratings were put on watch on 1 September 2023 due to concerns over KLK’s projected weaker financial metrics on completion of the corporate exercise. In the event that the agreement materialise, leveraged buyout of BPlant will increase KLK’s debt level substantially.
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 robust liquidity profile and financial flexibility. These strengths are expected to provide some buffer for a slower than expected deleveraging and recovery of KLK’s financial metrics in the near term.
KLK’s operating profit before depreciation, interest and tax (OPBDIT) hit a record high of RM3.7 bil in FY Sep 2022 (FY Sep 2021: RM2.6 bil). During the year, its plantation division charted a notable 58.3% earnings growth on the back of very strong CPO prices, offsetting the elevated production costs. Its manufacturing segment also posted an 18.5% earnings improvement despite demand slowdown in the second half of the year. KLK delivered a y-o-y weaker result in 9M FY Sep 2023 as CPO price softened from its peak and its downstream performance moderated given the challenging oleochemical sector. KLK’s advanced mechanisation initiatives and replanting programme are expected to improve productivity and relieve cost pressure in the longer term.
As at end-June 2023, KLK’s gearing and net gearing were y-o-y better at 0.59 times and 0.42 times, respectively (end-June 2022: 0.70 times, 0.48 times) after repayment of some debts. Continued hefty debt load of about RM9.5 bil, coupled with lower profitability had pushed the Group’s funds from operation (FFO) debt cover and FFO net debt cover down to 0.21 times and 0.30 times in 9M FY Sep 2023 (9M FY Sep 2022: 0.36 times and 0.52 times). These ratios underperformed our expectations, largely due to the weaker than expected downstream performance because of higher energy costs and sluggish oleo demand. We expect its leverage and debt coverage ratios at gross level to recover within our thresholds in the near term, supported by still high CPO prices, easing capex needs and demand recovery for oleo products.
The ratings are also backed by healthy productivity metrics that compare favourably to the peers’. 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.
Wong Ee Loo
(603) 3385 2521
Thong Mun Wai
(603) 3385 2522
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