Monday, Feb 04, 2002
Malaysian Rating Corporation Berhad (MARC) has assigned a short term rating of MARC-1 (bg) (MARC 1, bank guaranteed) and long term rating of A- (bg) (Single A minus, bank guaranteed) on Kuala Sidim Berhad’s (KSB) Tranche 1-RM50 Million Guaranteed Commercial Papers/Medium-Term Notes and a short term rating of MARC-3 (MARC 3) and long term rating of BBB+ (Triple B plus) on KSB’s Tranche 2-RM50 Million Commercial Papers/Medium-Term Notes.
The ratings of Tranche 1 reflect the unconditional and irrevocable guarantee provided by Southern Bank Berhad (SBB) whilst the ratings of Tranche 2 are the stand-alone corporate debt ratings of Kuala Sidim Berhad (KSB). The stand-alone ratings essentially reflect KSB’s weak cashflow protection measures, lower yield per mature hectare and the inherent risk and uncertainty of the palm oil industry. This is however mitigated by its moderate debt leverage, huge plantation land bank coupled with favourable plantation maturity profile which assures steady supply of fresh fruit bunches (FFB) over the duration of the debt issues.
The palm oil industry is characterised by volatility in commodity price of crude palm oil (CPO) with limited ability to influence prices. This is moderated to a certain extent as planters are increasingly venturing into milling operations hence integrating their business. Although KSB’s yield of 19 MT/ha at end-December 2000 is marginally above the national average, it is nevertheless comparatively less favourable than some of its rated peers. However, KSB has a size advantage as its total plantation acreage is about 14-15 times larger than some of its rated peers. Based on its plantation maturity profile as at end-December 2000, MARC does not foresee the company to incur any major replanting cost over the duration of the debt issues.
As a private palm oil mill operator, KSB’s competitive advantage would essentially lie on its accessibility and location. However these positives are dampened to a certain extent as new estates without their own mills may have some difficulty transporting their crops to outside mills on a timely manner as certain infrastructures like transportation systems are still being developed.
As a result of the maturity profile of its palms, KSB’s OER fell marginally to 19.4% at end-December 2000 compared to 19.5% previously. Given the increasing mature areas, its OER is expected to increase accordingly in the short to medium-term.
Prior to FY00, KSB’s operating margin was quite stable, at about 50%, well above most of its rated peers. This was mainly attributed to the favourable CPO prices then and to a certain extent the size of its estates. Similar to most of its peers, the decline in the CPO prices especially during the second half of calendar year 2000 took its toll on KSB’s operating margins which fell by slightly more than 50%. Going forward, MARC expects the volatility in the CPO prices to continue to dictate KSB’s profitability.
KSB’s debt leverage has been consistently trending upwards for the past four years. However, it had stayed within a manageable band of 0.06x-0.48x. After the proposed debt issue, its proforma debt leverage is expected to increase to 0.58x. KSB has been increasingly depending on borrowings from banks for its working capital requirements. Inter-company transactions also pose some concern as it has been noted that KSB has been continuously on-lending monies to its holding company. Amount owing by holding company has been steadily rising from RM75 million in June 1997 to RM419 million in FY00. The company does not anticipate any further cash injection.
MARC’s sensitivity analysis reveals that KSB’s projected cashflow is highly vulnerable to price changes. It is also uncertain as to whether KSB would be able to secure the projected long-term financing and rights issue.
The ratings of Tranche 1 reflect the unconditional and irrevocable guarantee provided by Southern Bank Berhad (SBB) whilst the ratings of Tranche 2 are the stand-alone corporate debt ratings of Kuala Sidim Berhad (KSB). The stand-alone ratings essentially reflect KSB’s weak cashflow protection measures, lower yield per mature hectare and the inherent risk and uncertainty of the palm oil industry. This is however mitigated by its moderate debt leverage, huge plantation land bank coupled with favourable plantation maturity profile which assures steady supply of fresh fruit bunches (FFB) over the duration of the debt issues.
The palm oil industry is characterised by volatility in commodity price of crude palm oil (CPO) with limited ability to influence prices. This is moderated to a certain extent as planters are increasingly venturing into milling operations hence integrating their business. Although KSB’s yield of 19 MT/ha at end-December 2000 is marginally above the national average, it is nevertheless comparatively less favourable than some of its rated peers. However, KSB has a size advantage as its total plantation acreage is about 14-15 times larger than some of its rated peers. Based on its plantation maturity profile as at end-December 2000, MARC does not foresee the company to incur any major replanting cost over the duration of the debt issues.
As a private palm oil mill operator, KSB’s competitive advantage would essentially lie on its accessibility and location. However these positives are dampened to a certain extent as new estates without their own mills may have some difficulty transporting their crops to outside mills on a timely manner as certain infrastructures like transportation systems are still being developed.
As a result of the maturity profile of its palms, KSB’s OER fell marginally to 19.4% at end-December 2000 compared to 19.5% previously. Given the increasing mature areas, its OER is expected to increase accordingly in the short to medium-term.
Prior to FY00, KSB’s operating margin was quite stable, at about 50%, well above most of its rated peers. This was mainly attributed to the favourable CPO prices then and to a certain extent the size of its estates. Similar to most of its peers, the decline in the CPO prices especially during the second half of calendar year 2000 took its toll on KSB’s operating margins which fell by slightly more than 50%. Going forward, MARC expects the volatility in the CPO prices to continue to dictate KSB’s profitability.
KSB’s debt leverage has been consistently trending upwards for the past four years. However, it had stayed within a manageable band of 0.06x-0.48x. After the proposed debt issue, its proforma debt leverage is expected to increase to 0.58x. KSB has been increasingly depending on borrowings from banks for its working capital requirements. Inter-company transactions also pose some concern as it has been noted that KSB has been continuously on-lending monies to its holding company. Amount owing by holding company has been steadily rising from RM75 million in June 1997 to RM419 million in FY00. The company does not anticipate any further cash injection.
MARC’s sensitivity analysis reveals that KSB’s projected cashflow is highly vulnerable to price changes. It is also uncertain as to whether KSB would be able to secure the projected long-term financing and rights issue.