RAM Ratings has affirmed Kuala Lumpur Berhad’s (KLK or the Group) AA1/Stable ratings of its Islamic Medium Term Note Programmes (IMTN)
The affirmation of the ratings it said is premised on the Group’s strong business fundamentals, with its recent acquisitions and investments supportive of medium to longer term cash flow and profitability growth. Amongst the largest plantation companies in Malaysia, its geographically diversified and highly integrated operations results in higher earnings stability compared to the less integrated peers. It also boasts productivity metrics that compare favourably to peers’. The tough operating environment of the midstream and downstream businesses, volatile crude palm oil (CPO) prices and higher scrutiny of environment and social issues affecting palm oil players, however, moderates these credit positives.
The ratings also take into consideration the expected recovery in its financial metrics in the near term despite performing below RAM’s rating thresholds, reflecting tapering capital expenditure needs, slower pace of acquisitions and anticipated recovery in the oleochemical performance. Improvement in its operating profit before depreciation, interest and tax (OPBDIT) in 9M FY Sep 2024, driven by the plantation segment, backs our optimism. Still, we caution that KLK will have limited debt headroom, unless supported by improved or additional operating cash flow. KLK’s soon to be completed integrated oleochemicals complex in Indonesia should also enhance KLK’s competitiveness against Indonesian peers, further strengthening its robust business profile.
In FY Sep 2023, KLK’s OPBDIT fell 42.5% y-o-y to RM2.1 bil from RM3.7 bil due to normalising crude palm oil (CPO) prices after record highs in the previous year and elevated production costs. Challenging conditions in the oleochemical business, characterised by high energy prices in Europe and subdued demand post pandemic also contributed to the decline. The Group achieved a 20.1% improvement in OPBDIT for 9M FY Sep 2024, supported by easing production costs and higher CPO sales volume in its upstream business which helped offset the weaker downstream performance.
As at end-June 2024, KLK incurred higher acquisition debts for the buyout of the remaining 40% shares in a joint venture owning land in Johor, remaining shares in KLK Sawit Nusantara Berhad and two Indonesian plantations from its parent company – Batu Kawan Berhad – as part of an internal business reorganisation. KLK also subscribed to Synthomer PLC’s rights issue to provide additional capital support amid challenging market conditions.
Higher debt load has weakened the gearing and net gearing ratios to 0.72 times and 0.55 times, respectively (end-June 2023: 0.59 times and 0.42 times). Despite that, its FFO debt cover and FFO net debt cover remained stable at 0.21 times and 0.28 times in 9M FY Sep 2024, buoyed by improved earnings.
