MARC has assigned a preliminary rating of AA-_IS to Evyap Sabun Malaysia Sdn Bhd’s (Evyap Malaysia) proposed RM500.0 million Sukuk Wakalah Programme with a stable outlook.

Evyap Malaysia is a subsidiary of Turkey-based Evyap Group, a longstanding and a well-established personal care product manufacturer with a strong market presence in Turkey and Eastern Europe. It owns and operates a vertically integrated oleochemicals manufacturing plant in Tanjung Langsat, producing fatty acids, soap noodles and bar soaps. The plant commenced production in 2015.

The assigned rating is premised on Evyap Malaysia’s strong domestic market position in oleochemicals and its healthy earnings, underpinned by an improved capital structure. The rating also factors in Evyap Malaysia’s geographically diversified customer base. Moderating the rating is the susceptibility of its financial performance to feedstock price movements and Evyap Malaysia’s limited operating track record in the region.

With plant production capacity of 380,000 MT/pa of fatty acids, 175,000 MT/pa of soap noodles, 36,000 MT/pa of glycerine and 108,000 MT/pa of bar soaps as at end-June 2020, Evyap Malaysia is one of the largest oleochemical players in Malaysia. It accounts for about 11% of total domestic oleochemical production capacity as at end-2019. MARC notes that Evyap Malaysia’s vertically integrated operations provide flexibility to vary its product mix to meet shifting demands. This is can be seen in increasing bar soap production due to heightened emphasis on personal hygiene with utilisation growing to 64.8% in 1H2020 from 62.5% in 2019. The utilisation rate for fatty acids has remained strong at 96.7%.

MARC observes that in establishing a manufacturing and distributing base in Malaysia, Evyap Malaysia has leveraged on the expertise of its parent Evyap Sabun Yag Gliserin Sanayi Ve Ticaret A.S. (Evyap Turkey) which has a significant market share in bar soap in Turkey and Iraq. However, as the company expands in Asian countries, it would meet stiff competition given product saturation in the region’s personal care segment. Nonetheless, this challenge is expected to be alleviated by the Evyap Group’s experience in building relationships with distributors and retailers. As at end-2019, Evyap Malaysia has expanded its customer base to 622 in 76 countries (2015:139 customers).

Due to a large customer base, no single customer dominates Evyap Malaysia’s revenue with the largest customer accounting for about 8% of its annual revenue in 2019 (apart from intragroup sales). Intragroup sales have declined to 29% of revenue at end-1H2020 (2016: 50%) and are carried out on an arms-length basis. MARC understands a transfer pricing policy is expected to be put in place by end-2020. Evyap Malaysia is required to maintain value-added margins in line with its pioneer status which allows for tax exemption until 2029.

In terms of costs, feedstock account for about 80% of its cost structure. Operating profit margin, which is susceptible to feedstock price movements, stood at 10.0% in 2019 (2018: 8.9%). Its high margin of about 34% in bar soap operations provides some buffer against adverse raw material price movements. Evyap Malaysia also mitigates this risk by entering into cost-plus basis contracts in which prices are agreed prior to commencing production. For 1H2020, Evyap Malaysia recorded revenue of RM706.0 million and pre-tax profit of RM51.9 million (1H2019: RM578.7 million; RM70.8 million); higher palm stearin prices during the period reduced bar soap margins, leading to a lower operating profit margin of 8.2% (1H2019:13.5%). Operating profit margin has been consistently above 8% for the past three years.

Evyap Malaysia also registered lower finance costs on reduced borrowings to RM179.7 million at end-1H2020 (2019: RM205.0 million). Debt-to-equity ratio improved further to 0.22x as at end-1H2020. Its near-term capex requirement is expected to be relatively modest and will be mainly used for equipment and machinery maintenance as well as some expansion in oleochemical capacity. While the company could make opportunistic acquisitions in oleochemicals, this is not expected to expand its leverage position significantly with expectations of not exceeding 0.5x. Evyap Malaysia’s capacity expansion and acquisitive activities would be partly funded by the proposed initial drawdown of the sukuk ranging from RM75.0 million to RM125.0 million. To date, no dividend has been declared since commencing operations; dividend expectations are expected to be low and moderate, circa RM40 million to RM60 million p.a. in the medium term.

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.

Contacts:
Raj Shankar, +603-2717 2956/ rajshankar@marc.com.my; 
Taufiq Kamal, +603-2717 2951/ taufiq@marc.com.my