TSH Resources Bhd - 2007

MARC has upgraded TSH Resources Berhad’s (TSH or the Group) RM60 million Murabahah Medium Term Notes (MMTN) rating to AA- ID from A+ ID, and reaffirmed its RM40 million Al-Murabahah Commercial Papers (MCP) rating at Marc-1ID. The ratings carry a stable outlook. The long-term rating upgrade reflects a strengthening of TSH’s financial profile due to the continuation of favourable palm oil fundamentals and its strong business position as an integrated palm oil plantation player, bolstered by the acquisition of significant plantation acreage in Indonesia. This is complemented by its wood flooring and trading/manufacturing of cocoa products businesses, which provide earnings diversity and tempers TSH’s exposure to the inherent cyclicality of its individual businesses. TSH has demonstrated its ability to sustain consistently strong key credit protection measures as a result of its robust profitability and cash flow generation augmented by its moderate capital spending and relatively low debt leverage.

Through steady organic growth coupled with the joint venture with Wilmar International, TSH has transformed into an integrated palm oil player with diverse business activities ranging from oil palm plantation and milling to palm oil refinery and bio-energy generation. In 2006, the Group’s plantation area expanded to 49,841 hectares from 4,750 hectares previously, of which 90.5% are newly acquired estates in Indonesia. Average Fresh Fruit Bunches (FFB) yield and Oil Extraction Rate (OER) were sustained above the industry averages. TSH’s palm oil refinery business commenced operation in January 2007 with a processing capacity of 0.8 million tones per annum. Meanwhile, its bio-energy generation operations contributed RM10.5 million to the Group’s total revenue in FY2006 (FY2005: RM4.8 million), in respect of which, 40% of the energy sales proceeds will be allocated for the servicing of the rated facilities.

In 2006, TSH’s wood flooring unit contributed about 20% to the Group’s total revenue. Around 84% of the division’s revenue was derived from export sales, mainly to Europe and the US markets. Leveraging on its established ‘Ekowood’ brand name, TSH continues to market its hardwood flooring products aggressively through its agents and overseas branches. Stable raw material supply and additional distribution channels particularly in Eastern Europe provide support to the growth objectives for the segment. Its cocoa trading business contributed 16.3% to the Group’s total revenue in 2006, attributed to the ample supply of quality cocoa beans during the year. Historically, contributions have been somewhat volatile due to constraints in the supply of cocoa beans. The Group plans to address this by establishing a centralised procurement unit in Ghana to source cocoa beans from African countries.

For the nine months ended September 2007, TSH’s total revenue increased by 34.5% to RM618.28 million whilst operating margin improved to 12.8% (3Q2006: 10.4%), attributed to higher crude palm oil and palm kernel oil prices, and contribution from its new refinery business. Profit before tax surged by 90% to RM84.67 million while cash flow from operations stood at RM68.72 million, resulting in a strong cash flow protection level. Its Debt Service Cover Ratio increased to 3.61 times as of FY2006 and its debt leverage level stood at 0.27 times as at 30 September 2007, partially due to TSH’s conservative financing of acquisitions and capital spending. MARC expects the Group’s near-to-medium term financial strategies not to materially deviate from its historical approach. As of 3Q2007, TSH’s liquidity is ample, with cash and bank balance of RM35.23 million for the MMTN’s RM15 million repayment scheduled in May 2008.

The stable outlook reflects MARC’s expectations that TSH will continue to deliver strong operating performance and generate healthy cash flows given the favourable industry prospects and its increased scale of operations whilst maintaining a conservative balance sheet with low debt levels over the medium term.

Major Rating Factors

Strengths

• Strong position as an integrated palm oil plantation player;
• Diversified sources of income from:-
• palm oil refinery business,
• bio-energy generation,
• wood flooring and cocoa-related business augment its oil palm plantation revenues.
• Growing plantation acreage and favourable maturity profile ensure sustainability and growth in FFB production.

Challenges/ Risks

• Cyclicality of the palm oil industry and other commodity-based businesses.