Boustead Holdings Bhd - 2012

MARC has affirmed the rating on Boustead Holdings Berhad’s (Boustead) RM1.0 billion Bank Guaranteed Medium Term Notes (BG MTN) programme at AAA(bg) with a stable outlook. The rating reflects the credit strength of the syndicated bank guarantee facility provided by OCBC Bank (Malaysia) Berhad (OCBC Malaysia), Public Bank Berhad (Public Bank), Malayan Banking Berhad (Maybank) and The Bank of East Asia (BEA) Labuan Branch. MARC has maintained the financial institution ratings of AAA/Stable on the aforementioned banks; the ratings on OCBC Malaysia and Public Bank are based on public information. Any subsequent rating actions on the rated programme will reflect a 'weak link' approach to credit enhancement; the rating on the BG MTN programme cannot be higher than that of the lowest rated supporting financial institution.

Boustead’s standalone credit profile, incorporates its diversified business mix and its status as a government-linked corporation that is reflected in the strong support extended by its major shareholder Lembaga Tabung Angkatan Tentera (LTAT), a statutory body established in 1973. These factors are counterbalanced by its recent debt-funded acquisitions that have led to an increased leverage position and weak cash flow protection measures which are partly attributed to an aggressive dividend policy.

Boustead is a holding company with subsidiaries and associates involved in diverse businesses that have been categorised into six divisions: plantation, property, pharmaceutical, trading & manufacturing, heavy industries, and finance & investment. Of these, the plantation division, which registered an operating profit of RM206 million for financial year ended December 31, 2012 (FY2012) (FY2011: RM299 million), remains the largest contributor to group operating profit at 33.3% (FY2011: 40.6%). The division was affected by the recent decline of crude palm oil (CPO) prices; its average CPO selling price fell by 11.3% to RM2,902/MT in FY2012 (FY2011: RM3,272/MT). MARC expects the challenging prospects for the plantation industry in 2013 to weigh on the near-term performance of the division. The division has 81,333 ha plantation land as at end-2012 (FY2011: 96,393 ha), all of which are located in Malaysia following the large disposal of 14,857 ha of land in Indonesia for RM119.5 million.   

Boustead’s property division which includes development, investment and hotel operations registered a decline in operating profit to RM161 million in FY2012 (FY2011: RM211 million), largely on account of lower fair value gains and fewer launches. Nonetheless, the division’s performance will be supported by current projects as well as moderate landbank size that affords further property development activities; steady rental stream from its retail malls and office buildings; and the operations of five hotels under the “Royale” brand that have achieved moderate occupancy levels. MARC observes Boustead’s heavy industries division continued to drag group earnings, registering an operating loss of RM97 million in FY2012, largely attributable to prevailing weakness in its commercial shipbuilding sub-segment. The losses in the year have been buffered to a certain extent by the positive contribution from the recently acquired MHS Aviation Bhd, which has a 50% market share of the offshore oil-and-gas helicopter service market.  

The weaker performance of the plantation, property and heavy industries divisions have been somewhat mitigated by the improved performance of the trading & manufacturing division (mainly from BHPetrol), finance & investment division (Affin Holdings Berhad) and the pharmaceutical division (mainly from Pharmaniaga Berhad’s role as sole concessionaire to supply approved drugs to government hospitals). For FY2012, group consolidated revenue rose 19.3% y-o-y to RM10.2 billion (FY2011: RM8.5 billion) while pre-tax profit declined 25.5% to RM619 million (FY2011: RM831 million). MARC also notes the group’s operating cash flow (CFO) fell to  negative RM422 million in FY2012 (FY2011: positive RM903 million) while free cash flow worsened to negative RM1.6 billion (FY2011: negative RM241.4 million) on continued acquisitions, capital outlays and dividends. The largely debt-funded acquisitions of businesses, including MHS Aviation and Pharmaniaga, have resulted in a sharp increase in group borrowings to RM6.6 billion (FY2011: RM5.1 billion; FY2010: RM3.2 billion), leading to a rise in the gearing level to 1.23 times (FY2011: 0.98 times).   

At the holding company level, Boustead derives its revenue largely from dividends from its subsidiaries and associate companies. For FY2012, the total dividends received stood at RM469 million (FY2011: RM360 million) but with sizeable dividend payout of RM351.7 million (FY2011: 394.8 million), cash retention has been minimal. Coupled with a high finance cost of RM126 million (FY2011: RM103 million) arising from increased borrowings which stood at RM1.95 billion (FY2011: RM1.82 billion), holding company credit metrics have weakened. In addition, MARC observes that 60% of its total borrowings are short-term in nature which exposes the company to rollover and refinancing risks that are somewhat mitigated by Boustead’s good accessibility to financial and capital markets. MARC believes that near-term strengthening of the holding company’s credit measures could stem from observing a more prudent dividend policy from the current minimum 70% dividend payout, improving the dividend generating ability of Boustead’s subsidiaries as well as exercising greater discipline on any further debt-funded acquisitions.
 
Noteholders are, however, insulated from the downside risks in relation to Boustead’s credit profile by virtue of the irrevocable and unconditional bank guarantee provided by the consortium of banks. Any changes in the supported rating or rating outlook will be primarily driven by changes in the consortium of banks’ credit rating/outlook.

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