[RAM] RAM Ratings assigns first-time ratings of AA3/Stable/P1 to Hextar Global

RAM Ratings has assigned corporate credit ratings of AA3/Stable/P1 to Hextar Global Berhad (Hextar or the Group), a company mainly involved in the manufacturing, trading and distribution of agrochemicals and specialty chemicals, and more recently, durian processing/trading. We have assigned the same ratings to the Group’s proposed Islamic Medium-Term Notes Programme of up to RM1.0 bil and Islamic Commercial Papers Programme of up to RM300 mil. Both programmes have a combined limit of RM1.0 bil (proposed Sukuk Wakalah programmes). 

The ratings consider Hextar’s position as a leading agrochemicals and notable specialty chemicals company in Malaysia. While the industry is fragmented, we understand that the bulk of generic agrochemical revenue is accounted for by several large players. The Group estimates that it commands about 30% of the local generic agrochemicals market. The full-year contribution from specialty chemical companies acquired by Hextar in 2021 propelled it into a notable position in this arena domestically. Hextar’s market position is reinforced by a wide product portfolio and in-house research and development capabilities which ensure product quality and innovation.

While the pace of acquisitions over the last two years has been moderate save for the recent acquisition beyond its core agrochemicals and specialty chemicals businesses, the management has shared that the Group’s acquisition strategy – led by founder’s son, Dato’ Eddie Ong – is deliberate and pursued in a measured manner to grow and scale the Group. Corresponding acquisition debt, if any, will need to be self-sustained by the newly acquired business. Historically, the acquired companies have always exhibited long operating track records, ranging from eight to 37 years, and are cashflow and earnings accretive to the Group. We note that the terms of the proposed Sukuk Wakalah programmes expressly prohibit acquisitions into new businesses or overleverage if the actions result in a negative rating action and a breach of financial covenants, respectively.

The Group displayed sturdy debt coverage ratios for most of the past five years. But more recent debt-funded acquisitions resulted in a much weaker funds from operations debt coverage (FFODC) of 0.17 times in FY Dec 2021, although it swiftly improved to 0.30 times in FY Dec 2022 given the full-year contribution from these new buys (2019-2020: 0.28 times-0.88 times). FFODC moderated slightly to 0.26 times last year as it drew down on working capital while only benefitting from two months of contribution from its durian business. We anticipate FFODC to remain strong at around 0.30 times over the next couple of years, factoring in a RM300 mil drawdown on the proposed Sukuk Wakalah programmes as guided by the Group; the Sukuk proceeds will be used to refinance existing borrowings. 

The Group’s various acquisitions render financial analysis difficult while its rapid expansion and acquisitive stance will lead to a less predictable financial profile going forward. The recently acquired durian business is new to the Group, presenting fresh challenges and risks. Hextar is exposed to the price volatility of feedstock for its durian processing business and competition from peers, while the seasonality of the fruit results in challenges in securing a steady supply of feedstock and volatile plant utilisation rates. We derive some comfort from its acquisition track record and funding strategy. The Group will continue to focus on brownfield acquisitions, targeting companies with good cashflow generation and businesses falling within the scope of its existing businesses. These criteria along with contracts with the existing management of some of its acquiree companies mitigate the Group’s fast-paced expansions.    

The surge in debts in recent years – total debt ballooned to RM421.5 mil by end-December 2023 from just RM60.1 mil in end-December 2020 – and its resulting high balance sheet leverage also constrain Hextar’s ratings. Compounded by a merger deficit reserve, Hextar’s gearing deteriorated sharply to 1.60 times (end-December 2020: 0.30 times). The Group’s debt to operating profit before depreciation, interest and tax (OPBDIT) ratio – a supplementary leverage measure – is however fairly healthy at 3.33 times as at end-December 2023. Gearing is expected to ease to around 1.00-1.40 times in fiscal 2024 and fiscal 2025 as proceeds from the sukuk drawdown will be used for refinancing. Debt to OPBDIT will improve to about 2.4 times-3.0 times in the next one to two years. 

Hextar contends with the cyclicality of the end markets for its specialty chemicals, input price fluctuations and foreign exchange risk from raw material imports for agrochemical production, which are denominated mostly in USD against the Group’s largely RM-based revenue. A wide product portfolio, catering to different industries, moderates this exposure to some extent. Additionally, the agrochemical segment’s “cost-plus” business model allows for some pass-on of input price increases to customers, albeit with a time lag of up to three months. 


Analytical contacts
Karin Koh, CFA
(603) 3385 2508
karin@ram.com.my

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