BOUSTEAD HOLDINGS BERHAD - 2015

MARC has affirmed its AAA_(bg) rating on Boustead Holdings Berhad’s (Boustead) RM1.0 billion Bank-Guaranteed Medium-Term Notes (BG MTN) programme 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 are based on publicly available information.

Boustead’s consolidated credit profile has substantially weakened on the back of lower earnings from its key subsidiaries in plantation, heavy industries and property. At the same time, the increased borrowings added pressure on the group’s financial metrics. Total borrowings rose to RM8.0 billion as at end-September 2015 from RM7.0 million in the corresponding period last year, elevating its leverage position to over 1.0 time. MARC notes that the group has largely relied on borrowings, including proceeds from fully drawing down the balance of RM66.0 million of its RM1.2 billion Perpetual Sukuk programme, to part fund a recent 50% acquisition in Irat Properties Sdn Bhd for RM250.0 million. Boustead’s recent rights issue proposal which would generate proceeds of about RM1.05 billion, of which RM486.0 million has been earmarked for debt repayment, would reduce some stress on its balance sheet.

For the nine months ended September 2015 (9M2015), Boustead’s group revenue and profitability declined sharply by 20.1% y-o-y and 33.3% y-o-y to RM6.2 billion and RM219.5 million respectively; aside from its pharmaceutical division, the performance of other divisions has been affected by a tough operating environment. The plantation division recorded a lower average crude palm oil (CPO) selling price of RM2,160 per metric tonne (MT) and was further dragged down by weak fresh fruit bunches (FFB) production, owing mainly to weather conditions. MARC views a mitigating factor for the plantation division’s performance going forward is the composition of Boustead’s total planted area of 65,680 ha of which 51% is of prime age while additional acreage continues to enter this phase. The division has also retained substantial cash of RM427.8 million from listing proceeds for investments in the division.

The heavy industries division recorded a loss of RM31.6 million for 9M2015 due mainly to provisions for restoration work on a navy ship. With sizeable government contracts of RM6.6 billion, the bulk of which are in the early stages, the division will continue to need sizeable working capital. MARC notes that Boustead’s pharmaceutical division, supported by a 10-year concession expiring in 2019, recorded a marginal 3.6% y-o-y increase in pre-tax profit to RM70.7 million in 9M2015. Nonetheless, the growth of the pharmaceutical division will remain subdued given the limited potential for expansion domestically.

Boustead’s property investments comprising two retail malls in Mutiara Damansara, Selangor, four office buildings in the KLCC area, and one office tower in Penang recorded strong occupancy rates of an average 95%. However, a large portion of the rental cash flows from these assets will be channelled to meet financial obligations under the outstanding RM760.0 million asset-backed bonds which will mature in 2019. The group’s hotel segment under the “Royale” brand has been impacted by lower occupancy rates of about 59%. In respect of property development, the group has a limited number of ongoing projects; during 9M2015, it launched 462 units of mid-priced double-storey terrace houses in its Taman Mutiara Rini residential project in Johor. The division’s other major project is the RM3.0 billion mixed development project along Jalan Cochrane, Kuala Lumpur, comprising commercial and residential units and a shopping mall. The project has reached around 60% completion, and is expected to be completed by end-2016.

MARC notes that in addition to new borrowings, the group generated cash from asset disposals. These include the disposal of 351.7 acres in Kulaijaya, Johor, for a total of RM203.9 million, of which RM90.7 million was received as at end-September 2015. The proceeds from asset disposals will buttress the group’s weakening operating cash flows. MARC also believes that through the proposed rights issue, Boustead’s institutional shareholder Lembaga Tabung Angkatan Tentera’s (LTAT) continued support would be crucial to enable the group to address its financial challenges.

At the holding company level, dividends from subsidiaries and associate companies declined by 39.9% y-o-y to RM215.4 million in 2014, mainly as a result of lower contribution from the plantation division following the listing of its plantation subsidiary. This notwithstanding, Boustead has adhered to its high dividend payout, amounting to RM373.2 million in 2014 (2013: RM359.4 million). The next scheduled repayment of RM91.0 million is due end-March 2016.

Noteholders are 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
• Institutional support provided by major shareholder.

Challenges/Risks

• Weak operational cash flow; and
• High leverage and modest liquidity position.