MARC has reaffirmed the ratings of TSH Resources Bhd’s (TSH) RM100 million in nominal value Al-Murabahah Commercial Papers/Medium Term Notes (CPs/MTNs) at MARC-1ID /A+ID with a stable outlook. The reaffirmation mainly reflects the continuous improvement in TSH’s financial performance on the back of robust operating records with regard to its diversified business portfolios covering palm oil milling and plantations, manufacturing of engineered solid hardwood flooring products and biomass power generation. Moderating factors include its exposure to cyclical developments in the palm oil industry and competitive pressure surrounding the wood products market.

In FY2005, TSH’s palm oil and wood products divisions collectively contributed 84% of the Group’s total revenue. The palm oil division continues to display strong performance with revenue growth of 16.6%, supported by improved crop yield averaging 29.3 tonnes per ha (2004: 25.7 tonnes per ha) and an extraction rate averaging 20.5% (2004: 21.4%). For the period up to October 2006, CPO price was higher at RM1,507 per tonne, compared to RM1,455 per tonne in the previous year’s corresponding period, hence strengthening the contribution of TSH’s palm oil division.

TSH’s wood products division, which produces engineered solid hardwood flooring products, contributed 25.3% of the Group’s total revenue in FY2005. Around 91% of its revenue was derived from export sales, mainly driven by the US and Europe markets, capitalising on the strong ‘Ekowood’ brand name. Nonetheless, the performance of this division hinges on market conditions of the export countries and revenue may be affected by movements in raw materials and foreign exchange. Notwithstanding, TSH’s strength lies with its continuous product innovation and active market expansion in response to intensifying competition in the hardwood flooring markets.

TSH’s biomass plant registered an average utilisation rate of about 70% (10MW vis-à-vis 14MW capacity). Through the 21-year energy purchase agreement signed with Sabah Electricity Sdn Bhd (SESB), TSH enjoys a steady source of cash flow and expects a net profit of approximately RM7.0 million by end-2006. 40% of the electricity sales proceeds have been earmarked for the servicing of the CPs/MTNs.

In FY2005, TSH’s revenue increased by 13.3% to RM541.41 million. However, pre-tax profit decreased by 40.5% to RM49.5 million, partly due to lower average CPO and PK prices, and rising operational costs caused by higher energy cost. The higher profit registered in FY2004 was mainly attributable to gains realised on listing of Ekowood. In 1HFY2006, operating profit margin slightly decreased to 10% (1HFY2005: 10.3%) with pre-tax profit recorded at RM28.54 million on the back of RM307.68 million in revenue. Debt service coverage (DSCR) for FY2005 decreased to 2.67 times (FY2004: 5.75 times) following higher borrowings incurred for capital expenditure. Nonetheless, TSH’s debt leverage remains manageable at 0.40 times as at June 2006. Moving ahead, the Group is in the midst of embarking on several projects for its business expansion, namely into biogas, paper mill and increasing its plantation land bank, to diversify and further improve its future earnings.