Optimal Olefins (Malaysia) Sdn Bhd - 2007

MARC has reaffirmed its AAAID ratings on Optimal Olefins (Malaysia) Sdn Bhd’s (‘Olefins’) RM250 million Al Bai Bithaman Ajil Islamic Debt Securities (‘BaIDS’). The rating outlook is stable. The rating reflects Olefins’ strong ownership structure, its secured feedstock source and favourable feedstock price structure from Petroliam Nasional Berhad (‘Petronas’) until 2023, its competitive cost structure, its 20-year offtake agreement with Optimal Glycols (Malaysia) Sdn Bhd (‘Glycols’) and Petlin Malaysia Sdn Bhd (‘Petlin’) under which the aggregate contracted ethylene sales volume fulfils about 90% of Olefins’ production capacity. Glycols and Petlin have strong petrochemical multinationals as project sponsors in addition to Petronas as common project sponsor. The ratings are also underpinned by its strong financial profile. Olefins’ profitability has been solid, reflecting rising sales volume, higher ethylene prices as well as widening margins between ethylene and feedstock prices in recent period.

Olefins is a joint venture company established by Petronas (64.25%), Union Carbide Corporation (‘UCC’) (23.75%) and Sasol Polymers International Investments (Pty) Limited (‘Sasol’) (12.0%). Olefins’ output of ethylene is mainly supplied to Glycols and Petlin, and to a smaller extent, third parties via Ethylene Malaysia Sdn Bhd (‘EMSB’). It also supplies propylene to Optimal Chemicals (Malaysia) Sdn Bhd (‘Chemicals’). Sales to Glycols, Petlin and Chemicals is facilitated through 20-year long term supply contracts. Olefins’ take-or-pay contracts with Glycols and Petlin provides assurance of minimum production during periods of excess industry capacity. In recent periods, global ethylene production capacities have been tight with no significant capacity additions anticipated in the near term. Olefins derives a competitive advantage from its favourable feedstock costs which is relatively insulated from the volatility in crude oil prices under its 21-year feedstock supply agreement with Petronas.

Reflecting Olefins’ improved plant availability and rising prices of ethylene and propylene, revenue surged by 74.6% to RM2.34 billion and earnings before interest and tax (‘EBIT’) margin rose sharply from 45.8% to 70.6% in FY2007. Olefins generated higher cash flow from operations in FY2007, as reflected in its strong debt service coverage ratio (‘DSCR’) of 6.10 times as at 31 March 2007, well above the minimum covenanted DSCR of 1.10 times. Olefins’ capitalisation improved further to 0.26 times as at end FY2007 (FY2006: 0.52 times), vis-a-vis the covenanted debt to equity cap of 2.33 times. The decline in gearing was attributable to the RM50 million BaIDS repayment and the strengthening of the ringgit which has resulted in a lower ringgit equivalent of USD denominated debt.

The stable outlook reflects Olefins’ solid long term fundamentals and its continued positive underlying growth trend.

Major Rating Factors

Strengths

• Strong ownership structure with Petroliam Nasional Berhad (‘Petronas’) as majority shareholder;
• Secured feedstock source until 2023 coupled with favourable feedstock price structure from Petronas;
• Competitive cost structure
• Offtake agreement with Optimal Glycols (Malaysia) Sdn Bhd (‘Glycols’) and Petlin (Malaysia) Sdn Bhd (‘Petlin’); and
• Solid profitability.