MARC Ratings 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 outstanding under the programme stood at RM300.0 million as at September 30, 2022.

The affirmed rating reflects Evyap Malaysia's vertically integrated oleochemical production facilities that have afforded control over its manufacturing process, its globally established customer base, and strong operating performance. These strengths are moderated by feedstock price risk, as well as fluctuations in transportation and distribution costs.

Since commencing plant operations in Tanjung Langsat in 2015, Evyap Malaysia has steadily expanded its capacity including for fatty acids ?— a primary oleochemical product — to 380,000MT p.a. (end-2016: 260,000MT p.a.), underscoring the demand for its oleochemical products. It also added an ester production facility with a capacity of 16,000MT p.a. in 2021 that will be increased to 24,000MT p.a. in 1Q2023. This has further enhanced Evyap Malaysia's product range that currently comprises multi-chained fatty acids, soap noodles (internal consumption and exports), glycerine and bar soaps.

MARC Ratings views Evyap Malaysia's ability to diversify its product range through its vertically integrated production facilities in response to market demand as credit positive. Its ability to draw on the expertise within Türkiye-based Evyap Group, a well-established group with over 90 years in the personal care segment, has been a key factor in its growth. We note that as Evyap Malaysia's products are used in the production of personal care products and pharmaceuticals, among others, for the mid-market level, they have been less vulnerable to economic cycles.

Evyap Malaysia's growing and diversified customer base of 424 companies across 70 countries has reduced the company's intragroup sales to 29% as at end-2021 (2016: 50%). We note that intragroup sales are undertaken in accordance with Evyap Malaysia's transfer pricing mechanism in line with requirements under the Malaysian Investment Development Authority's (MIDA) incentive programme. Its key feedstock — palm oil, palm stearin and palm kernel oil — are sourced from multiple manufacturers located close to its production facility in Tanjung Langsat Halal Park. The facility's proximity to Johor Port and Tanjung Langsat Port also assures connectivity to major regions and minimises transportation costs to export its products.

For 1H2022, Evyap Malaysia produced 179,221MT of fatty acids, with a strong utilisation rate of 94.3% (2021: 346,563MT; 91.2%). Utilisation rates for the production of soap noodles, glycerine and bar soaps recorded slight improvement to 64.4%, 86.8% and 63.9% (2021: 63.7%; 84.9%; 59.2%). Its new production line of esters has already reached a commendable utilisation rate of 87.1%. Revenue and pre-tax profit increased to RM1.4 billion and RM143.1 million (1H2021: RM835.0 million; RM44.9 million); the higher revenue was in line with the increase in commodity prices and sales volumes. We note that gross profit margin was slightly higher at 22.4% (2021: 21.1%) despite the high input costs, partly due to its cost-plus contracts that ensure some stability in profit margins amid commodity price fluctuations. The price fluctuations are also partly managed through forward purchase of palm oil products.

Total existing borrowings remains moderate at RM382.5 million relative to revenue generation. With an outstanding of RM300.0 million under the rated programme, the group has sufficient headroom to fund expansion. With sizeable cash balance of RM281.0 million, gross debt-to-equity (DE) ratio of 0.38x reduced to a net DE ratio of 0.11x as at end-June 2022. Debt protection metrics remained healthy with strong cash flow from operations (CFO) interest and debt coverage ratios of 12.1x and 0.5x.

The stable outlook incorporates MARC Ratings’ near-term 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.

A positive rating outlook would be considered if business operations continue to be smooth, and cash flow and leverage metrics remain strong such that CFO debt and interest coverage ratios are maintained at about 0.3x and 5.0x while gross leverage ratio is 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.