Thursday, April 7, 2011

Fitch affirms IOI Corp at 'BBB+'; outlook stable

KUALA LUMPUR: Fitch Ratings affirmed IOI Corp Bhd's long-term foreign currency issuer default rating (IDR) at 'BBB+'. The outlook is stable.

The ratings agency said on Thursday, April 7 the senior unsecured rating on its US$500 million notes due 2015, guaranteed by IOI Corp, had also been affirmed at 'BBB+'.

'The rating affirmation reflects IOI's strong operating cash generation and liquidity and its modest financial leverage.

'PLANTATION [] operations, which drive the majority of its cash generation, benefit from the strong maturity profile of its Malaysian plantations and the company's position as a low cost producer of crude palm oil (CPO),' it said.

Fitch said IOI's plantation ventures in Indonesia were broadly self-funding. Its downstream operations, which off-take most of IOI's CPO production, captured additional value from this vertical integration; however, profitability of these operations was thin due to high raw material costs.

IOI's traditional property development operations in Malaysia were performing well. However, its property development ventures in Singapore have been weak thus far and may need some financial support from the joint-venture partners, including IOI.

IOI's financial leverage as measured by adjusted debt net of cash to operating EBITDAR (including RM978 million of joint-venture debt guaranteed by IOI as of June 2010) was 0.8 times and its fund flow from operations to interest coverage was 7.7 times at end-December 2010.

Fitch said IOI's liquidity was strong with cash reserves of RM3.7 billion at end-December 2010 against limited debt maturities of around RM476 up to December 2011.

'IOI is expected to continue generating strong cash flows from plantations supported by robust CPO prices. Fitch notes that investments, in its core areas of operations - plantations, downstream operations and property - are an important growth driver for the company.

'Additionally, IOI has shown that it is committed to returning capital to shareholders during periods of excess liquidity, after having distributed a total of around RM5 billion over the last three fiscal years,' it said.

The ratings agency noted that although IOI's current gearing (as measured by net debt to equity) of around 10% was considered conservative for its current rating, it was far below the company's long-term target of 50%. Consequently, positive rating action was considered unlikely over the next 12 months.

Any major debt-funded investments or changes in the company's capital management leading to leverage being sustained over 2.5 times and/or increasing its business risk profile would put pressure on IOI's ratings.

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