MARC has reaffirmed the long term rating of PETRONAS Fertilizer (Kedah) Sdn Bhd’s (PFK) RM750.0 million Al-Bai Bithaman Ajil Islamic Debt Securities (BaIDS) at AAAID(s). The reaffirmation of the long term rating is premised on the strength of the support provided by the holding company, Petroliam Nasional Berhad (PETRONAS) in ensuring timely and full redemption of the BaIDS, either through equity, loan facilities, grants or other means. Further to the support, PFK’s strong financial profile as underlined in the last fiscal year adds further credence to the reaffirmation of the rating.

PFK is a wholly-owned subsidiary of PETRONAS and as part of the group, the company benefits from PETRONAS’ expertise and experience in operating the ammonia/urea plant owned by its subsidiary, ASEAN Bintulu Sdn Bhd. PFK derives its competitive advantage from the integrated nature of the plant i.e. from the supply of the natural gas on a long term basis with PETRONAS to the selling of the fertilizers through MITCO. The support from PETRONAS can be inferred as a firm commitment in ensuring that PFK remains competitive against its peers in the region specifically or in other parts of the world in general.

Currently, PFK exports about 55.4% of its products to Thailand, Australia, Vietnam as well as other countries within Asia, while the remaining, 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 its reliable supply track record provide the company with the competitive edge over Middle East fertilizer producers. PFK’s exposure to supply risk for 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.

PFK however is exposed to volumetric risk associated with urea sales in the spot market. To reduce such risk, PFK is committed to securing more long term contract with its customers by working towards achieving a targeted ratio of 80:20. Furthermore, as term sales prices are index-linked, PFK is also exposed to urea market price fluctuations, which is cyclical by nature. With the de-pegging of the US$/RM foreign exchange rate, PFK is now exposed to foreign exchange rate risk since sales receipts are in US$.

PFK recorded its best ever financial performance in FYE2005 when the company recorded a revenue and a pre-tax profit of RM488.3 million and RM199.0 million respectively. The stellar performance led to PFK registering an operating profit margin of close to 50% in FYE2005. PFK also recorded an improvement in its net cash flow from operations, jumping to RM246.6 million from RM163.5 million previously, an increase of approximately 51%. Subsequently, this led to better interest and debt coverage ratios of 8.5x (FYE2004: 5.3 times) and 3.6x (FYE2004: 2.2x) respectively. PFK’s debt-equity ratio also saw an improvement declining below 1.0x for the first time as the company enjoyed the benefits from the serial repayment of the BaIDS coupled with the increase in the shareholders’ funds following the higher profits attained by the company. Looking forward, as the company pares down its borrowings; the debt-to-equity ratio is also expected to decline further.

Currently, PFK exports about 55.4% of its products to Thailand, Australia, Vietnam as well as other countries within Asia, while the remaining, 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 its reliable supply track record provide the company with the competitive edge over Middle East fertilizer producers. PFK’s exposure to supply risk for 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.

PFK however is exposed to volumetric risk associated with urea sales in the spot market. To reduce such risk, PFK is committed to securing more long term contract with its customers by working towards achieving a targeted ratio of 80:20. Furthermore, as term sales prices are index-linked, PFK is also exposed to urea market price fluctuations, which is cyclical by nature. With the de-pegging of the US$/RM foreign exchange rate has opened up PFK to foreign exchange rate risk since receipts for sales are in US$.

PFK recorded its best ever financial performance in FYE2005 when the company recorded a revenue and a pre-tax profit of RM488.3 million and RM199.0 million respectively. The stellar performance led to PFK registering an operating profit margin of close to 50% in FYE2005. PFK also recorded an improvement in its net cash flow from operations, jumping to RM246.6 million from RM163.5 million previously, an increase of approximately 51%. Subsequently, this led to better interest and debt coverage ratios of 8.5x (FYE2004: 5.3 times) and 3.6x (FYE2004: 2.2x) respectively. PFK’s debt-equity ratio also saw an improvement declining below 1.0x for the first time as the company enjoyed the benefits from the serial repayment of the BaIDS coupled with the increase in the shareholders’ funds following the higher profits attained by the company. Looking forward, as the company pares down its borrowings; the debt-to-equity ratio is also expected to decline gradually.