[RAM] RAM Ratings affirms Batu Kawan's AA1/Stable ratings

RAM Ratings has affirmed Batu Kawan Berhad’s (Batu Kawan or the Group) RM1.0 bil Islamic Medium-Term Notes Programme (2022/2043) at AA₁/Stable. Batu Kawan’s financial performance and credit profile largely mirror that of Kuala Lumpur Kepong Berhad (KLK) (senior debt securities rated AA₁/Stable) which contributes more than 90% of the Group’s revenue and operating profit before depreciation, interest and tax (OPBDIT). While the Group’s integrated plantation business is parked under KLK, Batu Kawan has another industrial chemical business.

The affirmation of the ratings 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. Batu Kawan is Malaysia’s third largest planter and boasts productivity metrics that compare favourably to peers’. The Group enjoys higher earnings stability compared to peers given its geographically diversified and highly integrated operations. 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 OPBDIT in 9M FY Sep 2024, driven by the plantation segment, backs our optimism. Still, we caution that Batu Kawan will have limited debt headroom, unless supported by improved or additional operating cash flow. The completion of its integrated oleochemicals complex in Indonesia should also enhance Batu Kawan’s competitiveness against Indonesian peers, further strengthening its robust business profile.

In FY Sep 2023, Batu Kawan’s OPBDIT declined by 41.9% y-o-y to RM2.3 bil from RM3.9 bil due to normalising CPO prices following record highs in the previous year, along with elevated production costs. Challenging conditions in the oleochemical business, characterised by high energy prices in Europe and subdued demand post pandemic contributed to its decline. Reduced caustic soda demand from oleochemical manufacturers and weak liquid chlorine sales from the glove sector as well as high production costs also weighed on its industrial chemical business. The Group posted a 13.8% OPBDIT improvement in 9M FY Sep 2024, driven by easing production costs and higher CPO sales volume in its upstream business which helped mitigate the weaker downstream performance.

As at end-June 2024, Batu Kawan incurred higher acquisition debts at KLK for the buyout of the remaining 40% shares in a joint venture owning land in Johor and remaining shares in KLK Sawit Nusantara Berhad. Batu Kawan also subscribed to Synthomer PLC’s rights issue, increasing its associate stake to 26.9% (from 26.3%) to provide additional capital support amid challenging market conditions. Higher debt load has weakened its gearing and net gearing ratios to 0.71 times and 0.53 times, respectively from 0.58 times and 0.40 times a year ago. Despite that, its FFO debt cover and FFO net debt cover remained stable at 0.22 times and 0.29 times in 9M FY Sep 2024, buoyed by improved earnings.


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

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

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