The affirmation of PETRONAS Fertilizer (Kedah) Sdn Bhd’s (PFK) BaIDS rating reflects the strength of the support provided by its holding company, Petroliam Nasional Berhad (PETRONAS) in ensuring timely and full redemption of the BaIDS, either through equity, loan facilities, grants or other means.

PFK, a wholly-owned subsidiary of PETRONAS, benefits from PETRONAS’ expertise and experience. Currently, PFK exports about 60% of its products to Thailand, Australia, Vietnam as well as other countries within Asia, while the balance, is sold to the National Farmers Association (NAFAS), the nation’s largest urea consumer, for distribution in Malaysia. PFK’s proximity to major urea consuming markets in South East Asia and reliable supply track record provide the company with the competitive edge over Middle East fertilizer producers. PFK’s exposure to supply risk in respect of the main raw material, natural gas, is mitigated through a 20-year Gas Supply Agreement with PETRONAS, which ensures continuous supply of natural gas at fixed prices.

To reduce the volumetric risk associated with urea sales in the spot market, PFK is committed to maintain a target ratio of 80:20 for long term contracts and spot sales respectively. However, as term sales prices are index-linked, PFK is exposed to urea market price fluctuations, which is cyclical in nature. The US dollar-denominated contracts with all foreign customers provide PFK with a natural hedge against exchange rate risk.

PFK’s revenue is primarily generated from the sale of urea, contributing approximately 90% to the company’s total revenue over the past few years; with the balance contributed by the sale of ammonia and methanol. Its revenue has been on an increasing trend for the past two years registering RM300.4 million and RM325.1 million for FY 2003 and 2004 respectively. For FY 2004, PFK recorded its maiden net profit since commencement amounting to RM19.4 million (FY 2003: net loss of RM11.3 million). The turnaround was largely attributed to substantial reduction in financing cost following the repayment of USD320 million term loan (equivalent to RM1,216.0 million) via the BaIDS proceeds and shareholders’ advances. PFK’s operating profit margin continued to remain in double-digits, with a slight increase to 16.1% as against 14.8% previously.

During FY 2004 PFK’s net cash flow from operations escalated to RM153.7 million from RM89.8 million previously. Consequently, the interest and debt coverage ratios improved to 5.0 times (FY 2003: 0.9 times) and 2.1 times respectively. Its debt-equity ratio, meanwhile, decreased to 1.1 times from 4.8 times previously due to the partial reduction of its borrowings following the repayment of the USD term loan.