CREDIT ANALYSIS REPORT

Dura Palms Sdn Bhd - 2008

Report ID 2957 Popularity 1620 views 73 downloads 
Report Date Sep 2008 Product  
Company / Issuer Dura Palms Sdn Bhd Sector Plantations
Price (RM)
Normal: RM500.00        
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Rationale

MARC has affirmed the ratings of Dura Palms Sdn Bhd’s (Dura Palms) RM100.0 million Series A; RM90.0 million Series B and RM10.0 million Series C Sukuk Ijarah at AAAIS, AAIS and AIS  respectively. The ratings affirmation of Series A and B Sukuk Ijarah are premised on the quality of the collateral; the structural protections incorporated in the transaction; and the performance of the securitized estates buoyed by strong crude palm oil (CPO) prices. The rating affirmation of Series C Sukuk Ijarah, meanwhile, reflects the affirmed credit rating of TGHSB, an investment holding company with diversified businesses in oil palm and cocoa plantations, palm oil milling, manufacturing and trading.

Dura Palms, wholly-owned by TGHSB, is a special purpose company formed to purchase the beneficial rights to the oil palm plantation assets of its holding company’s three subsidiaries (Sellers/Lessees) and subsequently lease the securitized assets back to them under an Ijarah Agreement. The source of payment for secondary notes of Series A, B and C Sukuk Ijarah and repayment for the primary notes for Series A and B Sukuk Ijarah will be from the Ijarah rentals. In addition, Sukukholders benefit from the irrevocable undertaking provided by the originator, Teck Guan Holdings Sdn Bhd (TGHSB) to ensure that the obligations are met on a timely basis. The transaction also incorporates an asset put option that grants the Trustee the power of attorney to sell the plantation assets to third parties should the Sellers/Lessees fail to redeem the securitized assets.

MARC has revised its estimate of stabilised net operating income (NOI) of the securitised assets in line with its current practice of using RM1,500 per MT as long-term CPO price since 2008. The resulting stabilised NOI of RM28.3 million is 13.7% higher than the RM24.9 million arrived at in our initial rating. Apart from a RM300 per tonne upward revision in our estimate of long-term CPO price, the revised stabilised NOI also takes into consideration a 30.0% increase in the fresh fruit bunches (FFB) production, primarily labour and fertilizer costs. Consequently, MARC’s discounted cash flow valuation of the assets rose to RM258.0 million from RM227.2 million previously.

As of June 2008, the Loan-To-Value (LTV) for Series A and B Sukuk Ijarah improved to 34.1% (June 2007: 37.2%) and 65.5% (June 2007: 68.2%) respectively following three serial principal redemptions totalling RM21.0 million. Improvement in the LTVs is also attributed to the upward revision in the discounted cash flow valuation to RM258.0 million. The LTV at closing for Series A and B Sukuk Ijarah which are now projected to be 38.8% and 73.6% respectively (initial rating: 44% and 83.6%), remain within the respective rating levels.

The amortising structure of Series A and B Sukuk Ijarah provides for progressive reduction in LTVs. At maturity, Series A and B Sukuk Ijarah totalling RM98.0 million will be either refinanced or settled with the proceeds from the sale of the plantation properties comprising 6,484 hectares that are located within the district of Sandakan and Tawau, Sabah and valued at RM283.9 million (based on valuation as at September 2005). At maturity, this amount represents only about 34.5% of the total market value, affording considerable comfort.  Series C Sukuk Ijarah is structured with a single bullet maturity falling after the maturity of Series A and B Sukuk Ijarah.

Dura Palms’ plantations have continued to perform well during the 12 months ended January 31, 2008 (FY2008). With over 5,402 ha or 83% of the total planted areas comprising mainly prime mature palms aged between 8 to 15 years (as at 31 March 2008), its average FFB yield was consistently higher than Sabah’s average yield over the last six years. Despite bad weather for the first six months of 2007, annual FFB production (173,298 MT) and average FFB yield (26.8 MT/ha) fell marginally by 3.9% and 3.6% respectively for FY2008. Underpinned by strong CPO prices, the NOI of the securitized assets improved significantly to RM53.9 million in FY2008 (FY2007: RM23.9 million). This was reflected in the strong finance service coverage ratios for Series A and B Sukuk Ijarah estimated at 6.24x and 2.98x respectively.

In FY2007, TGHSB posted a net profit after tax of RM37.9 million on the back of RM1.03 billion in revenues (the group audited account FY2008 is unavailable). Operating profit margins remained stable at 6.2% (FY2006: 6.1%) while debt leverage as measured by the ratio of debt to equity weakened to 0.5 times from 0.34 times, owing to an increase in long-term borrowings through the Sukuk Ijarah totaling RM193.0 million.

Strengths

  • Strong performance of the estates that have exceeded stabilized net operating income (NOI);
  • Structural protections incorporated in the transactions; and
  • Amortising structure leads to a progressive reduction in Loan-to-Value (LTV) ratio, translating to stronger credit support for Series A and B over the tenure of the Sukuk Ijarah.

Challenges

  • Increasing cost of producing fresh fruit bunches (FFB); and
  • Production and yield of the FFB may be affected by climate conditions.
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