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MARC has assigned a short-term rating of MARC-1IS and a long-term rating of AA-IS to TSH Sukuk Ijarah Sdn Bhd’s (TSH Sukuk) issue of up to RM100 million Sukuk Ijarah Commercial Papers (ICP) and up to RM300 million Sukuk Ijarah Medium Term Notes (IMTN) programmes. Concurrently, MARC has affirmed its ratings of MARC-1ID / AA-ID on the RM100 million Murabahah Commercial Papers / Medium Term Notes programme of its holding company, TSH Resources Berhad (TSH). The outlook on the ratings is stable. TSH Sukuk, a wholly-owned subsidiary of TSH is a special purpose vehicle created to facilitate the issuance of the Sukuk ICP and Sukuk IMTN programmes. The transaction structure provides for certain assets to be leased to TSH for a period corresponding to the tenure of the Sukuk ICP and/or Sukuk IMTN. The lease payments will fund profit payments under the Sukuk. Principal repayment on the rated facilities is dependent on an undertaking of TSH to repurchase the assets. The assigned new ratings, in common with TSH’s affirmed debt ratings, therefore largely reflect TSH’s business position as an integrated oil palm plantation player which has benefited from the palm oil industry upcycle, its relatively low debt leverage and rapidly growing plantation asset base, as well as moderate earnings diversity afforded by contributions from its wood products and cocoa-related businesses. These positives are tempered by the inherent cyclicality of the commodity-based businesses and potential operational risks involving its newly-acquired estates in Kalimantan and certain existing estates in Sumatera, Indonesia.
TSH has steadily strengthened its revenue base by expanding its palm & bio-integration operations through further land bank expansion in Indonesia and improving the operating performance of its wood products and cocoa & vegetable fat divisions. In FY2007, revenues generated by the group increased by almost 40% to RM861.5 million (FY2006: RM624.7 million) of which palm & bio-integration division remains as the largest revenue contributor at 66.8% or RM575.7 million (FY2006: RM358.3 million) mainly on account of favourable CPO price. The group’s plantation operations will continue to generate the majority of its revenue premised on steady fresh fruit bunches (FFB) production from its Sabah plantation and a sharp rise in FFB production from its Indonesian estate beginning FY2010, the year in which more than one-third of the planted acreage is projected to mature. Its total FFB production is projected to grow steadily at a compounded annual growth rate (CAGR) of 24% to 520,780 metric tones (MT) in FY2012 (FY2007: 180,000 MT) while its crude palm oil (CPO) production is expected to grow at CAGR of 7% to 290,937 MT over the same period.
TSH’s biomass energy operations continue to provide recurring revenue stream backed by a 21-year Renewable Energy Purchase Agreement with Sabah Electricity Sdn Bhd. Meanwhile, the group’s wood products division has demonstrated business resilience despite the challenging global environment, aided by its success in developing new export markets in the Middle East and Africa and reducing its reliance on the US market. The cocoa & vegetable fat division charted commendable revenue growth of 22.7% to RM125.3 million, largely on account of initiatives taken to improve the reliability of cocoa bean supplies. Through its joint-venture with Wilmar International Limited, TSH’s refinery business benefits from the former’s strong distribution channel.
The group’s fixed and operating asset base more than doubled over the last four years to RM702.5 million in FY2007 from RM306.7 million recorded in FY2003. Historically, TSH has relied on internal funds to support its growth-related investments. Meanwhile, strong earnings retention have boosted its shareholders fund and has helped TSH to maintain its debt leverage level below 0.5 times (x) (FY2007: 0.36x) in the last five years. The group’s liquidity standing remains comfortable as demonstrated by its strong cash and bank balances amounting to RM26.6 million as of 1H2008 in comparison to its annual finance cost of approximately RM10 million. The RM300 million Sukuk IMTN 15-year programme will provide TSH with adequate funding as well as flexibility to finance its long-term capital outlay on plantation-related activities in Indonesia. TSH possesses the flexibility to scale down its future capital expenditure to preserve its cash position if warranted by operating conditions. TSH is expected to maintain its FSCR above 1.75x throughout the Sukuk facility period under the base case projected cash flows. The stable rating outlook reflects MARC’s expectations that TSH will maintain appropriate credit metrics for its ratings despite weaker near-term CPO prices in light of the increased scale of its integrated palm oil operations and conservative financial policies.
Major Rating Factors Strengths
• Integrated palm oil plantation player with earning diversity from wood products and cocoa-related businesses;
• Strong credit protection measures derived from prudent capital management and high earnings retention; and
• Growing contribution from Indonesian operations augment TSH’s oil palm plantation in Sabah. Challenges/Risks
• Cyclicality of the palm oil industry and other commodity-based businesses;
• Potential margin erosion caused by rising production and operating costs; and
• Exposure to operational risk in TSH’s certain Indonesian plantation estates.
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