Optimal Group of Companies - 2008 / 2009

MARC has affirmed its AAAID ratings on Optimal Olefins (Malaysia) Sdn Bhd’s (Olefins) RM250.0 million Al Bai Bithaman Ajil Islamic Debt Securities (BaIDS). The rating outlook is stable. The rating reflects Olefins’ ownership by Petroliam Nasional Berhad (Petronas) and The Dow Chemical Company (Dow), its secured feedstock source with favourable price structure from Petronas until 2023, cost advantage from integrated production and its 20-year offtake agreements with Optimal Glycols (Malaysia) Sdn Bhd (Glycols) and Petlin Malaysia Sdn Bhd (Petlin). The rating is also underpinned by its strong financial profile. Olefins’ profitability has been solid, reflecting higher ethylene prices as well as widening margins between ethylene and feedstock prices in recent periods. These strengths are tempered by plant’s unplanned outage which had impacted output and revenue for the financial year ended March 31, 2008. Olefins experienced an unplanned outage which lasted for 22 days at its plant during the course of FY2008.

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 its related companies Glycols and Petlin. 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. 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. Olefins also enjoys cost advantage in view of the integrated production process of Olefins, Glycols and Chemicals.

In FY2008, Olefins’ revenue declined by 21.9% to RM1,829.9 million due to plant’s unplanned outage. As a consequence, pre-tax profit declined by 25.9% to RM1,220.9 million. Despite lower profitability recorded during the financial year, Olefins’ operating profit margin remained robust at 68.1%. Its high profit margin and moderate level of fixed cost provide resilience against downturns in demand. Despite lower cash flow from operations during the financial year, Olefins’ debt service cover ratio (DSCR) remained robust at 4.56 times (x), which was well above the minimum covenanted DSCR of 1.10x. Olefins’ debt-to-equity (D/E) ratio improved to 0.15x as at March 31, 2008, leaving significant headroom against its covenanted gearing cap of 2.33x. The decline in gearing was attributable to repayment of existing  borrowings. For  the half year ended September 2008, Olefins’ revenue  was 34.0% higher than projected while its operating profit margin improved to 73.1%. Olefins has ample liquidity to meet its final redemption of RM50.0 million due in September 2009 based on its debt service reserve account balance of RM78.3 million as at December 24, 2008.

The stable outlook reflects Olefins’ solid long-term fundamentals and sufficient liquidity to meet the final redemption of the BaIDS.

Major Rating Factors

Strengths

Weakness