The rating of Petronas Fertilizer (Kedah) Sdn Bhd’s (PFK) RM750 million Al-Bai Bithaman Ajil Islamic Debt Securities (BaIDS) has been reaffirmed at AAAID(s) with a stable outlook. The rating reflects the support rendered by its holding company, Petroliam Nasional Berhad (PETRONAS) in ensuring PFK’s ability to meet its BaIDS obligation at all times. On a stand alone basis, PFK has performed exceptionally well, and has demonstrated the ability to generate strong cash flows while adopting excellent debt management strategies.

PFK is a wholly-owned subsidiary of PETRONAS and as part of the group, the company has benefited from PETRONAS’ expertise and experience in operating an ammonia/urea plant through its subsidiary, ASEAN Bintulu Fertilizer Sdn Bhd (ABF). PFK derives further advantages from the integrated nature of the plant i.e. a ready supply of natural gas on a long term basis with PETRONAS to the selling of the fertilizers through another Petronas owned company, Malaysian International Trading Corporation Sdn Bhd (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 and in other parts of the world in general.

For FY2005/06, PFK exported 53.1% of its products to countries including Thailand, Australia, Japan, Vietnam and The Philippines, among others. The remainder was sold locally 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 provides the company with an 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, where which the first price review is slated for 2008.

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 contracts with its customers. Furthermore, as term sales prices are index-linked, PFK is also exposed to urea market price fluctuations, which is cyclical by nature. Currently, PFK practices hedging for its USD denominated transactions.

PFK’s financial results in FY2006 were at a historical high on the back of higher urea selling prices. The Company registered RM595.5 million in revenue and RM268.2 million profit before tax representing an increase of 22.0% and 34.8% respectively, as compared to its financial results in FY2005. Operating profit margins at 50.4% were also at a five year high. Strong cash flows generated from its performance were used to make a scheduled principal repayment of RM70 million and enabled the company to make a prepayment of RM170 million in March 2006, and another prepayment of RM240 million in September 2006. On the back of these prepayments, the company’s debt-to-equity ratio declined to 0.13x as at 1H FY2007, which is well below the covenanted level of 1.25x. PFK’s forecasted RM218 million of cash flow from operations in FY2007 and its current FSRA balance of RM73 million as at 30 September 2006 ensures that principal payments due in FY2007 will be easily met.