07 May 2013 

RAM Ratings has assigned a long-term rating of AA1 to Batu Kawan Berhad's ("Batu Kawan") proposed Islamic Medium-Term Notes Programme of up to RM500.0 million ("proposed IMTN"), with a stable outlook.

Batu Kawan primarily manufactures chlor-alkali products and sulphuric acid. It is also involved in oil-palm and rubber cultivation and downstream resource-based manufacturing through 46.57%-owned Kuala Lumpur Kepong Berhad ("KLK"). Although KLK is an associate of Batu Kawan, we have treated it as a subsidiary in our credit assessment, given that we view it as a key strategic investment of Batu Kawan - which is the largest shareholder of KLK. Batu Kawan is controlled by the Lee family, which also helms the management of both companies. Batu Kawan and its subsidiaries, along with KLK, are referred to here as "the Group". KLK's Islamic securities are rated AA1/Stable/P1 by RAM. 

"The rating reflects the Group's established position in the plantation and chemical industries," explains Thong Mun Wai, RAM's Head of Real Estate and Construction Ratings. KLK is an integrated oil-palm plantation player, backed by a sizeable 193,230-hectare planted land bank and a leading position as a global producer of oleochemicals. KLK's plantations have demonstrated healthy yields that are comparable to that of regional peers, as well as an efficient cost structure which allows it to weather downcycles in crude palm oil ("CPO") prices. "Batu Kawan is also the largest manufacturer of chlor-alkali and sulphuric acid products in Malaysia," Thong adds.

The rating is also supported by the Group's strong financial track record, substantial financial flexibility and healthy liquidity position. Despite volatile CPO prices and the competitive oleochemicals sector, its margins on operating profit before depreciation, interest and tax ("OPBDIT") were estimated at between 16% and 21% in the last 3 years. The Group also kept a sturdy balance sheet, with gearing ratios of between 0.25 and 0.35 times, and demonstrated a strong debt-servicing ability, with an OPBDIT debt cover of 0.60 times to as high as 1 time (during a period of buoyant CPO prices in 2011). Looking ahead, the Group's OPBDIT debt cover is envisaged to stay strong, at between 0.40 and 0.50 times over the next 2 to 3 years.

The Group's credit profile is, however, constrained by its ambitious downstream expansion into the oleochemicals sector - an industry plagued by keen competition (particularly within the basic oleochemicals space) and vulnerability to high feedstock costs. KLK had commenced various expansions of its oleochemical-manufacturing capacity in FYE 30 September 2012, and will, upon their staggered completion this year, grow its capacity to produce basic oleochemicals. However, given that it has taken a measured approach in this regard, we expect its sturdy balance sheet and debt-protection measures to be preserved.

The rating further took into consideration the cyclical nature of the plantation and chemical sectors and the Group's susceptibility to volatile CPO prices. Both CPO and caustic soda are commodities, the prices of which are subject to many factors beyond the control of industry players. With more than half of the Group's planted land bank being in Indonesia, we are also cognisant of its exposure to a more challenging operating environment. This includes Indonesia's still-evolving institutional and legal frameworks, disputes over land titles, long drawn-out negotiations with existing land owners prior to obtaining cultivation rights, changes to export taxes and a lack of reliable industry statistics. In addition, there has been talk of the Indonesian Government revising its ruling on land ownership (amongst others) which may curb land-bank expansion in the republic. On balance, we observe that Indonesian players record stronger oil extraction rates as a result of fewer labour issues and more frequent harvesting.


Media contact
Karin Koh
(603) 7628 1174
karin@ram.com.my 

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