RAM Ratings assigns AA1 rating to KLK’s proposed IMTN programme
KUALA LUMPUR: RAM Ratings has assigned an AA1/stable rating to Kuala Lumpur Kepong Berhad’s (KLK) proposed Islamic MTN (IMTN) Programme of up to RM2 billion.
The reaffirmed ratings reflect KLK’s ability to maintain a strong financial profile despite the current industry downcycle. RAM expects the group to remain resilient through cyclical challenges, underpinned by its fairly lean cost structure and sturdy balance sheet.
“The group’s revenue and operating profit before depreciation, interest and tax (OPBDIT) fell a respective 12 and 22 per cent in fiscal 2018 amid weaker-than-expected CPO prices,” it said.
“This had offset its stronger upstream productivity and healthier manufacturing profit arising from cheaper raw materials and stronger sales volumes. Persistently weak CPO prices had pushed its revenue and OPBDIT down a respective 18 and 40 per cent y-o-y in 9M19. Given its weaker profitability, its annualised funds from operations (FFO) debt cover thinned to 0.30 times in 9M19, although still deemed commendable.
“KLK’s gearing ratio had eased slightly to 0.35 times as at end-June 2019. The group’s debt level was lower than anticipated, having descended eight per cent as so er CPO prices had reduced the working capital requirements of its downstream segment.”
RAM said the planter’s lighter debt load and sizeable cash pile – including liquid money-market instruments – kept its net gearing ratio at a low 0.24 times.
“Going forward, we expect its gearing and FFO debt coverage ratios to hover around 0.4 and 0.3 times, respectively – still commensurate with its ratings. Most of its capex needs over the next couple of years are anticipated to be covered by its operating cashflow. The Group is, however, always seeking expansion opportunities, the outcome of which will have to be reassessed as and when they materialise.
“Meanwhile, the ratings remain supported by KLK’s strong market position as Malaysia’s third largest plantation company and among the world’s top 10. Its integrated business model provides some degree of natural hedge in buffering against CPO price downcycles – as demonstrated in fiscal 2018.”
Its operations are geographically dispersed throughout Malaysia, Indonesia, Liberia, Europe and China. The Group’s strong agronomic practices have led to favourable yields that compare well with those of its large regional peers.
Additionally, the fairly lean cost structure of its upstream segment will keep serving it well during industry downcycles. On the other hand, RAM siad the ratings are constrained by the challenging operating environment of KLK’s enlarged mid- and downstream businesses, which remain plagued by persistent overcapacity and volatile feedstock costs.
“As with other planters, KLK is susceptible to volatile CPO prices and mounting pressure from environmental issues. In addition, the Group faces a tougher operating environment in Indonesia plus added risks associated with its venture in Liberia.
“In 3Q19, KLK has made a RM145 mil impairment in relation to its investment in the Butaw estate in Liberia a er having determined that the remaining plantable area upon fulfilling the high carbon stock and high conservation value assessments is no longer economically feasible.”