Boustead Holdings Bhd - 2010

MARC has assigned a rating of AAA(bg) to Boustead Holdings Berhad's (Boustead Holdings, or the holding company) RM1.0 billion Bank Guaranteed Medium Term Notes (BG MTN) Programme. The outlook on the rating is stable.

The rating reflects external credit enhancement for the notes that will be provided by financial institutions with a current rating of AAA/Stable from MARC. Any subsequent rating actions on the BG MTN will reflect a 'weak link' approach, i.e. the rating on the programme will be that of the lowest-rated financial institution participating in the consortium of guarantors.

A conglomerate listed on Bursa Malaysia, Boustead Holdings participates through its subsidiaries and associates in six industry sectors, namely, plantation, heavy industries, property, finance & investment, trading and manufacturing & services. Apart from investment holding, Boustead Holdings is also an operating company undertaking oil palm cultivation.

Boustead Holdings' cash flows are derived for the most part from dividends received from its operating subsidiaries. Net cash from operations (CFO) amounted to RM30.3 million in FY2009 while dividends received by the holding company amounted to RM283.9 million. Dividends received from subsidiaries and associates during FY2009 provided slightly over 2.2 times coverage (FY2008: 0.7 times) of interest paid of RM125.8 million at Boustead Holdings. MARC observed that interest paid of RM125.8 million and total dividends distributed by Boustead Holdings during the year of RM197.7 million were larger than its combined CFO and dividends received, suggesting a rather aggressive dividend policy.

The holding company has maintained modest amounts of cash on its balance sheet relative to its short-term borrowings in the last two financial years. MARC believes that rollover and refinancing risk is counterbalanced to a certain extent by Boustead Holding's financial flexibility, which is assessed as moderate, taking into consideration its status as a government-linked company.

The vast majority of dividends received are from non-listed companies controlled by Boustead Holdings. Debt at company level of Boustead Holdings constituted around 34% of consolidated debt at the group level as of end-FY2009, which in MARC's view implies a significant level of structural subordination of the holding company's debt to the debt at its operating subsidiaries. The group’s debt-to-equity ratio as at June 30, 2010 stood at 0.63 times. Adjusting for goodwill on consolidation, the group's debt-to-equity ratio would be 0.81 times. MARC notes that the group's leverage measures have improved relative to FY2007 and FY2008 levels, on account of its enlarged equity base following a rights issue in FY2009.

MARC anticipates an increase in Boustead Holdings' leverage metrics at both company and consolidated level from the initial issuance proceeds of RM600.0 million under the BG MTN Programme which will be mainly used for acquisition and capex spending. On a pro-forma basis as at June 30, 2010, the group's debt-to-equity ratio would increase to 0.76 times and 0.98 times after adjusting for goodwill. This could translate to higher pressure on subsidiaries to increase dividend payouts to meet the holding company's debt servicing needs.

The dividend stream from Boustead Holdings' investments will be largely driven by the earnings performance of its respective subsidiaries and associates in the near term. MARC is of the view that dividend capacity at the holding company's subsidiaries and associates could increase over a longer timeframe as a result of organic growth and/or strategic acquisitions. At consolidated level, Boustead Holdings has continued to achieve its return on assets and return on equity targets of 7.0% and 10.0% respectively during FY2009.

In the first six months of FY2010, the group posted revenues of RM2.98 billion and pre-tax profits of RM320.5 million. Group revenue was 20% higher than that recorded during the prior year’s corresponding period while pre-tax profit almost doubled. The group's broadly diversified operations continue to balance the cyclicality to which most of its individual core business segments are exposed. This was apparent in the first half of FY2010; higher earnings contribution from the plantation division offset the reduced contributions from the heavy industries and property segments. MARC expects the group's earnings performance to benefit from improving industry fundamentals over the next several quarters.

The stable rating outlook on the rating mirrors the expected outlook on the ratings of the financial institutions that will be providing irrevocable and unconditional bank guarantee facilities to Boustead Holdings under the programme.

Major Rating Factors

Strengths

Challenges