MARC has affirmed its rating of AA-_IS on Evyap Sabun Malaysia Sdn Bhd’s (Evyap Malaysia) RM500.0 million Sukuk Wakalah Programme with a stable outlook. 

The rating is premised on Evyap Malaysia’s strong domestic market position in oleochemicals and its broadened customer base for both soap and oleochemical products, which provides earning stability. The rating is moderated by the susceptibility of its financial performance to feedstock price movements as well as transportation and distribution costs over which the company has limited control.

Evyap Malaysia’s vertically integrated operations provide flexibility to optimise its product mix to cater to market demands. The production of fatty acid reached 364,987MT in 2020 (2019: 339,874MT) with a utilisation rate of 101.4%, while the utilisation rate of soap noodle and glycerine inched up to 91% and 89% (2019: 84.2%; 83.6%). In 2020, its bar soap production rose to 78,734MT (2019: 67,518MT). The significant growth in production indicates the boost in sales volume to meet its broader customer base. In view of its large customer base, the top five customers contribute only 5% of Evyap Malaysia’s total revenue, mitigating concentration risk and helps in reducing dependence on intragroup sales. 

Evyap Malaysia also benefits from tax exemptions on its full range of products under Malaysian Investment Development Authority’s (MIDA) incentive program for 15 years. With this, Evyap Malaysia is required to determine all sale prices by adding a prescribed level of profit margin on its product costs for both external and internal sales under arm’s length transactions. Evyap Malaysia plans to complete its transfer pricing mechanism by end-2021.

In 2020 and into 9M2021, Evyap Malaysia’s revenue has continued to grow as its customer base expands. It recorded 19.5% and 27.05% higher revenue y-o-y during the two periods (FY2019: RM1.13 billion; 9M2020: RM1.06 billion). The erosion of its gross profit margin due to higher input costs for its palm oil-based feedstock seen since mid-2020 has been partly mitigated through its cost-plus basis contracts, enabling the company to transfer the higher input costs to its customers. Evyap Malaysia registered 19.5% and 20.7% gross profit margin in FY2020 and 9M2021 (FY2019: 23.7%; 9M2020: 20.7%). However, overheads, including distribution and transportation costs, which have increased in line with revenue, have dragged the company’s overall earnings. Operating profit margin tightened to 7.7% as at end-September 2021 (FY2019: 10.0%). Earnings for FY2021 could remain at the current performance until the issue of high transportation cost moderates. 

While the company has pared down its borrowings to RM207.7 million (FY2020: RM256.1 million), leverage has improved to 0.26x as at end-September 2021. Debt protection metrics have also remained healthy; cash flow from operation (CFO) interest and debt cover stayed strong at 15.7x and 0.64x at end-2020. In view of the expansion of its oleochemical production facilities, the company had for the first time registered negative free cash flow (FCF) of RM22.9 million as at end-September 2021 (2020: RM54.3 million). 

The stable outlook incorporates MARC’s expectation that Evyap Malaysia’s moderate business risk and strong credit profile will be broadly in line with the company’s business and financial strategy with an adherence to financial discipline over the next 12-18 months. 

Any rating upgrade will consider sustained cash flow generation and cash flow metrics while maintaining a strong balance sheet with leverage remaining below 0.50x. 

The rating could come under pressure if profitability declines sharply from expectations and/or borrowing levels rise sharply, weakening debt coverage metrics.