MARC Ratings has affirmed its A+_IS rating on JB Cocoa Sdn Bhd’s (JB Cocoa) Islamic Medium-Term Notes (Sukuk Wakalah) programme of up to RM500.0 million with a stable outlook. JB Cocoa is a wholly-owned key manufacturing subsidiary of Singapore-based JB Foods Limited which has provided a corporate guarantee to the programme. Accordingly, the rating assessment considers the consolidated credit profile of JB Foods in view of the operational and financial linkages within the group.

The rating affirmation primarily reflects JB Cocoa’s defensible market position as one of the world’s key cocoa processors and longstanding experience in the cocoa industry that has enabled the group to manage the volatility of cocoa price movements. Its global grinding market share has remained steady over the past four years at 3%. With a total combined grinding capacity of 180,000MT p.a. (Malaysia: 67%; Indonesia: 33%), JB Cocoa recorded a utilisation rate of 91.0% in 1Q2023 (2022: 84.0%), underlining steady demand for its key products, namely cocoa butter, cocoa powder, and cocoa liquor (mass). Its processing facility expansion in Côte d’Ivoire is targeted to be completed by end-2024, and will add grinding capacity of 50,000MT p.a. MARC Ratings views the expansion will afford JB Cocoa with lower logistical costs and provide tax savings in exporting to the European Union.

Revenue and operating profit grew 15.7% and 24.9% y-o-y to RM2.2 billion and RM114.2 million in 2022, supported by higher sales volume and normalisation of processing margin on easing of logistical bottlenecks. Nonetheless, operating margin remains in the low single digit due to higher cocoa bean price which rose by 22.6% y-o-y to USD3,009/MT as at end-May 2023. The price increase is due to concerns on potential crop deficit due to adverse weather patterns. We note cocoa bean purchases continue to account for about 90% of its cost of sales.

Borrowings declined y-o-y to RM780.5 million as at end-2022, 78.2% of which were related to trade financing. Excluding trade facilities, borrowings would be RM170.1 million including a RM100 million issuance under the programme, translating to an adjusted debt-to-equity ratio of 0.21x. We project total borrowings to increase to about RM1.1 billion over the next two years (including trade financing). The group had indicated another drawdown of RM225 million on the rated programme, partly to refinance the RM75 million sukuk maturing in November 2023, with the rest going towards near-term capex for its ongoing Côte d’Ivoire facility expansion totalling about RM570 million. The low operating margins and execution risk posed by the expansion of its cocoa grinding facility in Côte d’Ivoire remain rating concerns.