Boustead Holdings Bhd - 2014

MARC has affirmed its 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, all of which carry financial institution ratings of AAA/Stable from MARC. The ratings on OCBC Malaysia and Public Bank were arrived at based on publicly available information. 

On a standalone basis, Boustead’s credit profile has weakened since the last rating review despite improved performance of its plantation, pharmaceutical, heavy industries and property divisions for the financial year ended December 31, 2014 (FY2014). The group has relied on external funds to meet operational and investing requirements as well as address its sizeable financial commitments. The plantation division benefited from higher average crude palm oil (CPO) price of RM2,401/MT for FY2014 (FY2013: RM2,353/MT) and registered an 18.4% year-on-year increase in pre-tax profit (on excluding the one-off gains in FY2013). Nonetheless, the prevailing subdued pricing environment for CPO is likely to weigh on the division’s performance over the near term. A mitigating factor is the favourable maturity profile of Boustead’s total planted area, of which 54% comprises palm trees in the prime age of between 10 and 20 years.

MARC observes that the recent improved performance of the pharmaceutical division, undertaken through Bursa Malaysia-listed subsidiary Pharmaniaga Berhad, was supported by higher non-concession domestic business. The concession agreement with the Malaysian government to manufacture and distribute pharmaceutical and medical products domestically has enabled Pharmaniaga to generate a stable income stream. The company has added to its existing four domestic manufacturing plants with the acquisition of a new plant in Indonesia. For FY2014, revenue rose by 9.1% y-o-y to RM2.1 billion while pre-tax profit increased by 40.8% to RM100.1 million due largely to an absence of impairment charges.

The heavy industries division generated pre-tax profit of RM26.2 million for FY2014 (FY2013: pre-tax loss of RM89.0 million) mainly from acceleration of the Littoral Combatant Ship (LCS) project. Although the division has an unbilled order book of about RM7.4 billion for naval and commercial vessels construction projects from the government as at end-June 2014, high working capital requirements have led to the undertaking of a RM4.9 billion syndicated loan facility. Boustead’s property division owns and manages two retail malls in Mutiara Damansara, Selangor, four office buildings in the Kuala Lumpur City Centre area, and one office tower in Penang, in addition to property development and hotel operations. Revenue contributions from property rentals have been stable, supported by strong occupancy rates of above 90%. However, MARC notes that the ability of its five investment properties to upstream dividends remains limited given the need for the rental cash flows to meet financial obligations under the outstanding RM900.0 million asset-backed bonds issued in July 2012.

In regards to property development, the response to its Taman Mutiara Rini project moderated during 1H2014. The overall take-up rate for the 1,455 units launched is about 70.2%. Boustead’s major development project will be the RM3.0 billion mixed development project in Jalan Cochrane, Kuala Lumpur. MARC also expects the group’s undeveloped land bank of 838.4 acres as at end-June 2014 to offer strong potential for development.

For FY2014, pre-tax profit improved to RM685.7 million (FY2013: RM517.1 million, excluding special dividends and fair value gains on deemed disposal of investment securities) despite the 5.4% y-o-y decrease in revenue to RM10.6 billion. MARC notes that part proceeds from the listing of plantation subsidiary Boustead Plantation Berhad in June 2014, which generated RM928.0 million, was utilised to repay borrowings of RM390.0 million to the holding company. In addition, a further drawdown of RM451.0 million on its RM1.2 billion Perpetual Sukuk programme in 2014 was partly used to finance the RM200 million acquisition of a land parcel in Klang. Boustead now plans to acquire a 50% interest in the company which operates automated enforcement system for RM127.8 million, which is likely to be funded by borrowings. Group debt increased by RM444.7 million to RM7.1 billion (FY2013: RM6.6 billion), however debt-to-equity ratio declined to 0.93 times at end-FY2014 (FY2013: 1.12 times) due mainly to the full equity treatment of the Perpetual Sukuk.

MARC observes that the financing cost for the Perpetual Sukuk is fairly high, ranging from 6.1% to 6.25% p.a. with a step-up rate of 1.5% p.a. on the fifth anniversary of the issue date of the relevant tranches and 1.0% per annum thereafter (up to a maximum of 15%). Although the Perpetual Sukuk programme has a dividend stopper, profit payment of the Perpetual Sukuk is not likely to be deferred given that Boustead has historically declared high dividends of about 70% of net profit after tax annually. MARC views Boustead group’s liquidity position to be modest in relation to its financial obligations; a sizeable portion of cash and cash equivalents which stood at RM1.1 billion at end-FY2014 (FY2013: RM637.9 million), has been earmarked for plantation land purchase.

At the holding company level, Boustead’s revenue largely consists of dividends from subsidiaries and associate companies. For FY2014, dividends received declined by 39.9% y-o-y to RM215.4 million (FY2013: RM358.2 million). The declining trend of dividend income coupled with a high dividend pay-out policy would weaken its liquidity position. Given that holding company level borrowings have increased by 42.5% to about RM2.1 billion (FY2013: RM1.5 billion), finance charges on the Perpetual Sukuk and current borrowings will continue to weigh on Boustead’s credit metrics. The upcoming scheduled repayment of RM350.0 million under the rated programme is due in November 2015. Noteholders are, however, insulated from any downside risks in relation to Boustead’s credit profile by the irrevocable and unconditional bank guarantees provided by the consortium of banks.

Major Rating Factors

Strengths

• Diversified earnings base; and
• Strong institutional support provided by major shareholder.

Challenges/Risks

• Weak operational cash flow;
• High leverage and modest liquidity position; and
• Challenging outlook for key business segments.