MARC has affirmed its AAAID rating on Kwantas SPV Sdn Bhd’s (Kwantas SPV) outstanding RM60 million Class A sukuk with a stable outlook. Concurrently, MARC has also affirmed its ratings on Kwantas SPV’s RM65 million Murabahah Commercial Papers/Medium Term Notes (CP/MTN) Programme at MARC-2ID(cg)/A-ID(cg). The rating outlook on the Murabahah CP/MTN Programme has been revised to stable from negative.

The rating of the Class A sukuk reflects the strong collateral backing for sukukholders, and a marginal decline in net operating income (NOI) in the 12 months to June 30, 2011 (FY2011) as a result of reduced fresh fruit bunches (FFB) production and higher operating expenses. Nonetheless, the NOI of the securitised estates remain within MARC’s expectations and should comfortably amortise the outstanding sukuk over its remaining term. The stable outlook incorporates the rating agency’s expectation of gradually declining FFB output with over 70% of the securitised estates’ palms in the past prime bracket, balanced against a supportive pricing environment for palm oil. Meanwhile, the ratings on the Murabahah CP/MTN Programme mirror the corporate credit ratings of Kwantas Corporation Berhad (KCB) as the guarantor of the notes. The affirmed ratings and revised outlook to stable reflect the improvement in KCB’s financial metrics following the temporary cessation of its downstream oil palm operations in Guangzhou, China. With the full redemption of the Class B and Class C sukuk, Murabahah CP/MTN noteholders now have a priority charge over the securitised plantation assets which rank immediately after Class A sukukholders.

MARC has revised the value of the securitised estates to RM315.0 million, 23.7% higher than MARC’s prior year cashflow valuation. The loan-to-value (LTV) ratio of 18.9% for Class A sukuk following the redemption of the first RM20.0 million instalment in May, 2011 provides strong collateral backing for the sukuk.

In August 2011, the total matured area of securitised estates remains at 8,101 hectares (ha) with 72.1% of the area falling within the past-prime age bracket.  MARC expects FFB production to gradually decrease through the remaining three year term of sukuk. MARC also estimates that half of the planted area of the securitised estates would require replanting. Nevertheless, the planned capital expenditure for the replanting is expected to take place only after the final redemption of Kwantas SPV’s rated obligations.

The average FFB yield of the securitised estates fell to 21.6 metric tonnes per hectare (MT/ha) (FY2010: 23.7MT/ha) due to rainy season during the first six months of the financial year ending June 30, 2011 (1HFY2011) which affected the palm oil industry in Sabah. However, Kwantas SPV’s average FFB yield outperformed the Sabah state and Malaysia industry by 1.0 MT/ha and 3.2 MT/ha respectively. Furthermore, actual NOI from the securitised estates decreased marginally to RM48.0 million (FY2010: RM49.9 million), although the average FFB prices increased to RM672 per MT (FY2010: RM459 per MT). This is mainly due to higher labour costs for field maintenance and windfall tax charges on higher CPO prices.

KCB’s standalone credit profile has improved since MARC’s last rating action. In FY2011, KCB’s revenue increased to RM1,251.1 million (FY2010: RM1,248.2 million) and its pre-tax profit increased significantly to RM144.6 million (FY2010: RM5.2 million) largely due to sale of its land bank in Sarawak. KCB divested its 70%-owned subsidiary, Green Ace Resources Sdn Bhd, and 5,206 hectares of leasehold land in Sarawak in FY2011 for a total consideration of RM52.4 million to improve its liquidity. MARC regards KCB’s free cash flow generation as sensitive to the timing and magnitude of its replanting expenditure. The stable outlook on KCB’s corporate credit rating incorporates MARC’s expectation of prudent cash flow and liquidity management as well as the satisfactory cash flow generation from its matured plantations in Sabah.

Contacts:
Ahmad Tajuddin Yeop Aznan, +603-2082 2255/ tajuddin@marc.com.my;
Jason Kok, +603-2082 2258/ jason@marc.com.my;
Sandeep Bhattacharya, +603-2082 2247/ sandeep@marc.com.my.