MARC Ratings has affirmed its rating on Evyap Sabun Malaysia Sdn Bhd’s (Evyap Malaysia) RM500.0 million Sukuk Wakalah Programme at AA-_IS. Concurrently, the rating outlook has been revised to positive from stable.

The outlook revision reflects Evyap Malaysia’s ability to maintain healthy operating performance, underpinned by strong cash flow metrics. Its vertically integrated oleochemical production facilities and well-established global customer base remain key drivers to the rating affirmation.

Evyap Malaysia’s production of a wide variety of oleochemical products — multi-chained fatty acids, soap noodles, glycerine, ester, and bar soaps — at its Tanjung Langsat plant with a sizeable capacity of 380,000MT p.a. underscores its position as one of the largest domestic oleochemical producers. The group is able to respond to changes in market demand through its vertically integrated facilities; it also benefits from the expertise of its Türkiye-based parent company, Evyap Group, which has a track record of over 90 years in the personal care segment, primarily in Europe and the Middle East.

For 1H2023, the utilisation rate for its primary oleochemical product, fatty acids, was high at 92.1%. Meanwhile, the 62.1% utilisation rate for its ester production with a capacity of 16,000MT p.a., was commendable, given that it was only recently set up. MARC Ratings also notes that the group has diversified its customer base, leading to a reduction in intragroup sales to 26% in 1H2023 from 50% in 2016. Its customer base covers over 100 countries.

Evyap Malaysia remains susceptible to price movements in key feedstock — palm oil, palm stearin and palm kernel oil — although the group has maintained its margin through its ability to pass through feedstock price increases to customers. The hike in natural gas price, however, had weakened its margin to 7.3% in 1H2023 (three-year average: 10.1%). With the decline in the average global natural gas price by 52.9% to US$2.8/MMBtu in 3Q2023 from 4Q2022, the margin is expected to revert to around 10% in the near term. This notwithstanding, margin pressures remain a key moderating factor to the rating. The rating agency notes that supply risk for its feedstock is mitigated by sourcing from multiple refineries close to its production facilities near Johor Port.

For 1H2023, the group recorded revenue of RM898.3 million. Cash flow from operations of RM56.2 million provides strong interest and debt coverages at 7.3x and 0.3x. Total borrowings of RM355.0 million as at end-June 2023 translates to a gross debt-to-equity ratio of 0.33x and a net cash position given considerable cash balance of RM356.9 million.

Its current capex requirement is for the ongoing construction of a RM350 million oleochemical plant in Medan, Indonesia. As the expansion will be largely funded internally with around 30% to be met by borrowings, Evyap Malaysia’s debt metrics are not expected to weaken materially. Expected to commence operations in 2025, the new plant will produce fatty acids — with capacity of around 210,000MT p.a. — glycerine, and soap noodles. The rating agency views the Indonesian operations would further strengthen Evyap Malaysia’s position in the oleochemical segment. While the expansion would entail execution risk, the rating agency draws comfort from Evyap Malaysia’s track record in developing and operating its oleochemical plant in Malaysia.

Within the next 12 months, the rating will be upgraded if Evyap Malaysia broadly maintains its cash flow and debt metrics at current levels, in particular, if gross leverage ratio remains below 0.50x. Conversely, the rating outlook will be revised to stable if group financial performance substantially weakens from expectation.