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Mar 27, 2014

MARC has affirmed the rating on Boustead Holdings Berhad’s (Boustead) RM1.0 billion Bank Guaranteed Medium Term Notes (BG MTN) programme at AAA(bg) 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, however, based on publicly available information. Any subsequent changes to the rating and/or the outlook on the rated programme will reflect the changes in the credit strength of the lowest rated of the four banks in line with MARC’s weakest link approach.

Boustead group’s standalone credit profile is underpinned by its diversified business segments including palm oil, property and pharmaceutical, although the prevailing weak crude palm oil (CPO) price and slim operating margins in other segments have continued to weigh on its operating profit. For financial year ending December 31, 2013 (FY2013), operating profit was flat at RM504.1 million (FY2012: RM508.4 million) on revenue growth of 14.1% year-on-year to RM11.2 billion (FY2012: RM9.8 billion). Notwithstanding the group’s challenging operating environment, Boustead undertook and completed the privatisation of its listed plantation real estate investment trust (REIT), Al-Hadharah Boustead REIT (AHB-REIT), the process of which was largely funded by part proceeds from a RM1.2 billion perpetual junior sukuk programme established in December 2013.  To date, RM683.0 million sukuk have been issued under the programme.  

Boustead’s wholly-owned subsidiary Boustead Plantations Berhad, which undertook the privatisation of AHB-REIT, has consolidated the REITs plantation assets of 19,945 ha with its plantation subsidiary’s total area of 62,945 ha, following which the subsidiary is expected to be listed on the local bourse by 1HFY2014. MARC observes that while 74.7% of Boustead Plantations’ total oil palms are considered to be in the matured phase, the 18.9% year-on-year decline in average CPO price in FY2013 to RM2,353/MT (FY2012: RM2,902/MT) has led to a sharp decline in the plantation division’s profitability. The division’s pre-tax profit declined to RM130.7 million for FY2013 (FY2012: RM206.4 million) on revenue of RM695.7 million (FY2012: RM872.5 million). MARC notes the recent rebound in CPO price is expected to improve prospects for the division, supported by increase in plantation asset size following the acquisition of 2,409.8 ha of oil palm land in Lahad Datu, Sabah, for RM184.6 million in 4QFY2013. 
 
Among the group’s other divisions – property, finance, heavy industries, pharmaceutical, trading and industrial – only the improved performance of the property division has largely offset earnings weakness in FY2013. The property division’s performance was supported by sale of land parcels and improved take-up rates of its medium-cost properties in Johor. The heavy industries division recorded a higher percentage of completion for the Littoral Combat Ship (LCS) project which contributed to the group’s revenue growth. MARC notes that the heavy industries division, which primarily undertakes naval and commercial vessels construction, has an unbilled order book of about RM7.4 billion as at end-December 2013 that should support earnings visibility in the medium term. Nonetheless, the division has high working capital requirements for which Boustead has drawn on RM4.9 billion syndicated facilities to part-finance the LCS project.

MARC also notes that the group’s 51% stake in MHS Aviation Berhad, which has a 50% share in the domestic offshore oil and gas helicopter market, is expected to support earnings growth through helicopter service provider’s long-term contracts. On a consolidated basis, Boustead group’s pre-tax profit rose to RM707.7 million for FY2013 (FY2012: RM592.7 million), due mainly to a sharp rise in non-operating income to RM276 million (FY2012: RM118 million). This was due largely to gains from the AHB-REIT privatisation and asset sale; however, on excluding non-operating income, pre-tax profit would stand at a lower RM431.7 million (FY2012: RM475.0 million). MARC views Boustead group’s liquidity position to be modest in relation to its financial obligations; while cash and cash equivalent stood at RM607.8 million at end-December 2013 (FY2012: RM324.9 million), a sizeable portion is expected to be utilised for its AHB-REIT privatisation exercise. The group’s debt-to-equity (DE) ratio stood at 1.12 times as at end-FY2013 (FY2012: 1.24 times). 
 
At the holding company level, Boustead’s revenue largely consists of dividends from subsidiaries and associate companies. For FY2013, dividends received declined 21.5% to RM358.3 million (FY2012: RM456.2 million) on weaker performance of subsidiaries. The lower dividends coupled with its high dividend payout policy have resulted in minimal cash retention. While holding company-level borrowings declined by 25.5% to about RM1.5 billion (FY2012: RM1.9 billion), finance charges from the perpetual sukuk and current borrowings will continue to weigh on the company’s credit metrics. The upcoming scheduled repayment of RM78.0 million under the rated programme is due in December 2014.

Noteholders are, however, 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. 

Contacts: 
Jasmine Kua, +603-2082 2280/  jasmine@marc.com.my
Taufiq Kamal, +603-2082 2251/  taufiq@marc.com.my
Rajan Paramesran, +603-2082 2233/  rajan@marc.com.my .

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