[RAM] RAM Ratings assigns AA1 rating to KLK's proposed IMTN

RAM Ratings has assigned an AA1/Stable rating to Kuala Lumpur Kepong Berhad’s (KLK or the Group) proposed 30-year Islamic Medium-Term Notes (IMTN) Programme of up to RM2.0 bil. The ratings of KLK’s other debt programmes (listed below) were reaffirmed during our review in September 2021. 

Proceeds of the proposed sukuk will be utilised for shariah-compliant general corporate purposes including future acquisitions, investment, capital expenditure, working capital requirements and the refinancing of existing borrowings. The initial issuance from the programme will refinance the Group’s RM1.0 bil of sukuk maturing in September 2022.

We expect the Group’s credit fundamentals to remain supportive of the ratings over the next few years. KLK’s solid market position as the third largest planter locally and among the top 10 worldwide is underlined by its vast and geographically diversified oil palm plantations. Its highly integrated business model provides a certain extent of natural hedge against crude palm oil (CPO) price downcycles. The ratings are also backed by healthy productivity metrics and a fairly lean cost structure. The challenging operating environment of the Group’s midstream and downstream businesses as well as mounting scrutiny of environment and social issues are moderating factors.

Current CPO prices are robust, averaging RM4,418/MT in 2021. We expect prices to ease from these lofty levels but stay above historical averages (2016-2020 average: RM2,510/MT), buoyed by a slowdown in new plantings in Indonesia and Malaysia. Rising consumption as economies recover from the pandemic and CPO’s current steep discount to soybean oil also support a higher floor price for CPO. The soybean oil price has itself doubled in the past year due to tight supply caused by weather-related disruptions and its increased use in the production of renewable diesel, also known as hydrotreated vegetable oil.

On 6 September 2021, KLK acquired 56.2% of IJM Plantation Berhad (IJMP), triggering a mandatory general offer (MGO) for the remaining listed shares. Subsequent to the MGO, KLK owns 95.0% of IJMP as at end-December 2021. The latter was delisted in November 2021. The acquisition, together with the purchase of a 60% stake in PT Pinang Witmas Sejati which was completed on 1 October 2021, increased the Group’s total oil palm planted area by 35% to 289,135 ha, in line with its strategy to expand through brownfield acquisitions.

In FY Sep 2021, KLK’s revenue and operating profit before depreciation, interest and tax (OPBDIT) surged 28.3% and 71.2%, respectively, to RM19.8 bil and RM2.6 mil (FY Sep 2020: RM15.4 bil and RM1.5 mil). All its business segments (plantation, manufacturing and property) demonstrated stronger performances. As IJMP was acquired only in September 2021, the full effects of its contribution will kick in from FY Sep 2022 onwards.

As at end-September 2021, the Group’s gross and net gearing ratio weakened to 0.63 times and 0.38 times, respectively (end-September 2020: 0.56 times and 0.23 times) after the drawdown of borrowings to purchase the IJMP stake and debt consolidation. While the ratios exceeded the threshold for the ratings due to the earlier than expected completion of the acquisition, we expect still robust CPO prices to boost retained earnings. Gross gearing is envisaged to retreat below the benchmark of 0.50 times in the near term, even under RAM’s conservative CPO price assumptions of RM3,000/MT for 2022 and RM2,800/MT for 2023. Higher profitability, backed by strong CPO prices, kept KLK’s funds from operations (FFO) debt cover and FFO net debt cover sturdy at a respective 0.31 times and 0.51 times in FY Sep 2021 (FY Sep 2020: 0.25 times and 0.61 times). 


Analytical contacts
Wong Ee Loo
(603) 3385 2521
eeloo@ram.com.my

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