Demand for CPO will support FFB price over the long term. While we think that the CPO price is likely to remain volatile amid the current economic conditions, the global demand for vegetable oils will continue to support CPO price over the long term. CPO price averaged RM2,250/MT in 1H09 and we expect it to weaken to an average of RM1,800/MT in 2H09 as a result of slow global economic recovery and rising inventory. This brings our average CPO price for 2009 to RM2,000/MT, higher than MARC’s CPO price assumption (revised in 2008) of RM1,500/MT for plantation-backed transactions.

Lower earnings expected for FY09. The securitised estates recorded net operating income (NOI) of RM51.2m for 9MFY08 as a result of high CPO price. While the transaction’s assumed CPO price is lower than our expectation of RM2,000/MT for 2009, higher operating costs may result in lower NOI generated in FY2009.

LOAN-TO-VALUE RATIOS (LTVS) & OTHER STRUCTURAL FEATURES

Higher DCF value lowers Sukuk’s LTVs. MARC’s revision of CPO price assumption to RM1,500/MT from RM1,300/MT raised the securitised estates’ NOI and discounted cash flow (DCF) value to RM28m (fm RM24m) and RM254.5m (fm RM218.2m) respectively1. The new DCF value has lowered the LTVs for the Sukuk and resulting in the upgrade of Class B Sukuk from AA to AAA in Oct2008.

Table 3: LTVs of Sukuk Ijarah
Sukuk Ijarah	Size (RM mil)	LTV at Issuance	LTV as of Last Review	LTV at Maturity	Current LTV
Class A – AAA	80.0	36.7%	31.4%	7.8%	31.4%
Class B – AAA	15.0	43.5%	37.3%	-	37.3%
Class C – A+	25.0	55.0%	47.2%	-	45.1%
Source: MARC, Maybank-IB * 2008 review, Oct 2008.

Amortisation structure enhances sukukholders’ protection over time. The amortization feature incorporated improves LTVs for the Sukuk and enhances sukukholder protection over time. Indeed, we think that the Class C Sukuk (rated A), which is maturing May2010, is of good investment value given its current LTV of 45.1%, a level within the AA rating band.

Sukuk Reserve Account (SRA) mitigates short term liquidity risk. The SRA is pre-funded with an amount equivalent to one profit payment of the Sukuk to mitigate short term liquidity risk. It is worth noting that if the trustee of the Sukuk takes longer than six months to find substitute lessees or buyers for the securitised estates following a default by existing lessees, we think that the one profit payment buffer may not be sufficient to ensure the smooth running of the transaction. Nevertheless, we view the risk of default in Ijarah payments as low given the importance of the estates (operating assets) to the lessees.

Irrevocable and unconditional undertaking by KCB. KCB undertakes to make good any shortfall in Ijarah payments if the lessees fail to meet their obligations under the LAs and to provide sufficient funds to Kwantas SPV for all administrative expenses incurred. While the ratings of KCB do not have any bearing on the ratings of the Sukuk, the undertaking provides additional comfort to the transaction as a whole.

KWANTAS CORPORATION BHD (KCB)

Table 4: Kwantas Corporation Bhd’s Selected Financial Indicators
FYE 30 June (RM’ mil)	3QFY2009*	2008	2007	2006
Profit & Loss Highlights
Revenue	1,176.2	3,452.2	1,950.0	1,122.2
OPBIT	-62.5	243.9	138.0	34.7
OPBIT margin	n.m	7.0%	7.0%	3.1%
Balance Sheet Highlights
Cash & equivalent	76.5	144.3	108.3	33.1
Shareholders’ Funds	790.7	873.8	701.7	487.6
Long-term borrowings	148.8	143.6	186.0	213.0
Short-term borrowings	539.7	540.2	315.9	217.3
Gearing	0.87X	0.78X	0.72X	0.88X
Net Gearing	0.77X	0.62X	0.56X	0.81X
Source: Company’s annual reports, audited accounts, Maybank-IB *Ended 31 March 2009. n.m: not meaningful

Disappointing FY2009 results. KCB registered commendable performance in FY08 attributable to high CPO price but its 9MFY09 result deteriorated significantly due reversal in CPO price, contract cancellations, high raw material costs for its downstream operations, and waning demand for its products as a result of global recession.

Corporate credit ratings under downgrade pressure. While we believe that the worst may be over for KCB as CPO price has recovered from its low since 2QFY09, we are cautious on KCB’s declining liquidity position. As of Mar2009, the group’s short term debt was 7.1X of its cash balance. Hence, we think that KCB’s ratings may be downgraded if it fails to show meaningful improvements in its financial profile in the coming quarters. Nevertheless, we noticed that the group successfully rolled-over its RM20m MCPs, and issued RM10m new MCPs in early July2009.

CONCLUSION

Buy Class C Sukuk. With its current LTV of 45.1%, we believe the Class C Sukuk, which is maturing May2010, if of good investment value. In addition, the securitised estates’ commendable performance over the past five years coupled with the sustainable demand for CPO are expected to support the value of the estates should unforeseen circumstances arise.