[RAM] RAM Ratings assigns AA3/Stable/P1 corporate ratings to SK Nexilis and its subsidiary, debutants in the sukuk market

RAM Ratings has assigned corporate credit ratings of AA3/Stable/P1 to SK Nexilis Co Ltd (SK Nexilis or the Group) and its wholly owned subsidiary, SK Nexilis Malaysia Sdn Bhd (SKNXM or the Company). We have also assigned an AA3/Stable rating to SKNXM’s proposed RM2.0 bil ASEAN Green SRI Islamic Medium-Term Notes Programme (proposed ASEAN Green SRI Sukuk Wakalah). 

SK Nexilis is a wholly-owned subsidiary of SKC Co Ltd, which in turn is 40% owned by its ultimate shareholder, SK Inc. The latter is the second largest chaebol in South Korea, with a solid credit standing, while SKC is a key player in the country’s chemicals sector with a fairly diversified business profile. 

SK Nexilis’ stand-alone risk profile reflects its respectable position as one of the top 10 copper foil manufacturers globally, with an estimated market share of 13%-15% based on capacity in the past few years. Its technology is leading-edge, backed by the ability to produce the thinnest, widest and longest copper foil, giving the Group an advantage over peers. SK Nexilis has diverse end markets while its production base is spread out over South Korea and Malaysia and will soon extend to Poland. The Group is largely shielded from fluctuations in copper prices due to the industry practice of quoting product prices at copper prices plus a processing fee, although periods of significant price volatility may affect the efficacy of this cost pass-through arrangement. SK Nexilis is also expected to benefit from the ramp-up of its Malaysian plants when they are fully and successfully commissioned given the better cost efficiency vis-à-vis its existing South Korean plants.

SK Nexilis’ geared balance sheet, its capital-intensive business and aggressive expansion however, moderate its stand-alone ratings. Total debts soared to KRW1.13 tril as at end-December 2023 (end-December 2020: KRW282 bil), resulting in a high gearing ratio of 1.12 times. Funds from operations debt coverage (FFODC) deteriorated to 0.17 times in FY Dec 2022 and was marginally negative last year due to a challenging market (FY Dec 2020-2021: ~0.30 times). With its new plants at the tail end of completion, debt level is expected to slowly ease and FFODC to gradually improve on the back of a slow sector recovery, albeit still weaker than historical levels in the next couple of years. SK Nexilis is exposed to the competitive and oversupplied global copper foil sector. As copper foil feeds into batteries for electric vehicles (EVs) and renewable energy (RE) storage systems, copper foil demand is vulnerable to changes in government environmental targets and policies on RE and EVs.

SK Nexilis’ ratings incorporate an uplift from a high likelihood of extraordinary support from SKC, given the former is one of four core growth engines for the larger SK group of companies. SKC’s fairly diversified business profile balances its highly geared balance sheet, weak debt coverage and exposure to industry cyclicality. SK Inc’s solid credit standing is anchored by strong global business diversity and its leading market positions in sectors like oil refining, telecommunications, gas and energy, and copper foil manufacturing, albeit moderated by its high leverage amid aggressive expansion. Despite SK Group’s portfolio rebalancing exercise to address its weakening financials, it is unlikely to pause its investments in the semiconductor and battery businesses.

As a wholly owned subsidiary, SKNXM’s ratings are aligned to those of its parent, SK Nexilis. SKNXM’s plants will be SK Nexilis’ largest and most technologically advanced as well as the most cost-competitive. Accordingly, SKNXM is expected to be SK Nexilis’ main earnings contributor when its operations are in full swing, and key to the Group’s turnaround from its loss-making position last year. The Group handles SKNXM’s orders and sales. Affiliate company SK On Co., Ltd. is also expected to be a major customer, accounting for a substantial portion of SKNXM’s sales volume over the next few years.  


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

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

Media contact
Sakinah Arifin
(603) 3385 2500
sakinah@ram.com.my