IJM Plantations Bhd - 2008

MARC has upgraded IJM Plantations Berhad’s (IJMP) RM150 million Al-Bai Bithaman Ajil Serial Bonds (ABBA) long-term rating to AA-ID from A+ID. The rating outlook is stable. The upgrade reflects the group’s solid operating performance supported by an improving plantation maturity profile attesting to its superior estate management practice, strong profitability and cash flow generating capability, and low debt leverage. These strengths are tempered by the inherent cyclicality of the commodity business and potential risks arising from growth initiatives. The current rating incorporates MARC’s expectations that the current weak industry pricing environment for crude palm oil (CPO) will prevail in 2009. At the same time, MARC believes that IJMP’s low debt levels, together with the financial discipline to cut back on discretionary spending as needed and maintain strong liquidity will allow it to continue operating profitably amid the more volatile economic conditions while maintaining credit measures appropriate for its rating level.

IJMP is principally involved in the cultivation and management of palm oil estates in Sandakan and Labuk-Sugut regions of Sabah, East Malaysia. The group has demonstrated strong revenue growth on the back of the continued expansion of total planted area which stood at 25,293 hectares (ha) as of March 31, 2008 (FY2008) and the improving maturity profile of its oil palm plantations. IJMP’s strong financial performance in FY2008 also reflects the upturn in palm oil prices, averaging RM2,544 per tonne, compared to RM1,511 per tonne recorded in FY2007. For the six months ended September 2008 (1HFY2009), revenue and pre-tax profit registered at RM310.9 million and RM107.0 million respectively. Operating profit margins for the same period was robust at 33.5%.

The group’s ample liquidity position is derived from its strong cash flow generating capability and large free cash flows. Its prudent financial policy is demonstrated by the low debt-to-equity level of 0.1 times (x) as of 1Q2008 that is expected to decline further due to a combination of higher retention of earnings and paring down of existing debt. Cash flow coverage measures remained ample relative to its outstanding debt and upcoming debt maturities. The facility’s final repayments of RM35 million is due in December 2009.

Recent growth initiatives include its new plantation business in Indonesia and milling operations in India, which are expected to be meaningfully accretive to earnings no earlier than the fourth year of operations. The near-term drag on profitability and cash flow caused by these growth initiatives has been manageable. IJMP remains a strong cash generator. Moreover, the management remains committed to maintaining significant cash balances, currently standing at RM87.7 million as of September 30, 2008.

The stable outlook reflects MARCs expectations that IJMP will maintain a strong financial profile, consistent with its rating, despite less favourable near-term industry fundamentals.

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