CREDIT ANALYSIS REPORT

TSH Sukuk Ijarah Sdn Bhd - 2010

Report ID 3811 Popularity 1541 views 124 downloads 
Report Date Dec 2010 Product  
Company / Issuer TSH Sukuk Ijarah Sdn Bhd Sector Plantations
Price (RM)
Normal: RM500.00        
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Rationale

MARC has affirmed its MARC-1IS /AA-IS ratings on TSH Sukuk Ijarah Sdn Bhd's (TSH Sukuk) RM400 million Sukuk Ijarah Commercial Paper (ICP)/Sukuk Ijarah Medium Term Notes (IMTN) programme and revised the outlook on the ratings to stable from developing.

TSH Sukuk is a special purpose funding vehicle created to facilitate the issuance of the notes under the rated programme on behalf of plantation-based TSH Resources Berhad (TSH or the group).

The affirmed ratings on the programme reflect TSH's growing and profitable palm oil operations and expectations of a favourable price environment for crude palm oil (CPO) going into 2011. MARC believes that this will generate sustainable improvements in internal cash flow generation over the next several quarters and credit protection measures, supporting its ratings stability. The affirmed ratings also incorporate TSH's reduced capital spending intensity in recent quarters which MARC considers to be a signal of TSH's commitment to maintain sound credit metrics.

The stable outlook reflects expectations that a stronger performance of its palm oil business will more than offset weaker near-term earnings prospects for the group's hardwood flooring and cocoa processing businesses. However, given the sensitivity of TSH's operations to general economic conditions, and commodity price and exchange rate movements, the possibility remains that the expected improvements in its financial profile may not materialise. If the group's financial profile does not demonstrate continued improvement commensurate with expectations over the next several quarters, the rating outlook and ratings will be revisited.

Palm oil operations generated about 80% of TSH's revenue and close to all of its pre-tax profits in FY2009. The group has rapidly expanded its plantation hectarage in recent years by acquiring plantation land in Kalimantan, Indonesia. Of its 26,100 hectares (ha) of planted oil palm hectarage, approximately 50% is matured. The maturity profile of the group's planted oil palm estates is expected to generate an average annual percentage increase of 25% in matured hectarage and 38% in fresh fruit bunch (FFB) production between 2010 through 2013. The group plans to plant 6,000 ha annually between 2011 through 2013, although MARC expects actual implementation to reflect a balance between growth objectives and maintaining reasonable debt levels while improving its free cash flow position.

The weaker performances of TSH's hardwood flooring and cocoa processing businesses have weighed on the overall performance of the group. The operating environment remains difficult for the group's hardwood flooring operations, currently undertaken through its 67.5%-owned subsidiary Ekowood International Berhad. Losses for the wood products operations of RM2.6 million for the first half of FY2010 (1HFY2010) reflected lower selling prices and margins due to adverse currency movements, notably the strength of the ringgit against the euro and the US dollar. The bulk of TSH's wood products are exported to Europe and US, where consumer sentiments and spending trends remain relatively subdued. The cocoa manufacturing and trading segment fared better with a modest operating profit of RM0.2 million for 1HFY2010 but continues to be challenged by soft demand and volatile raw material prices.

For 1HFY2010, TSH's revenue showed a 9.1% decline against 1HFY2009 while its pre-tax profit improved marginally to RM35.6 million (1HFY2009: RM35.3 million). MARC expects the palm oil plantation operations to benefit from the favourable demand and pricing environment in the near term. TSH will be able to rely on its growing FFB output to sustain the positive momentum in earnings going forward. Recovery in the wood business is likely to be delayed as indicated by the increase in cumulative losses from RM1.1 million at the end of the first quarter to RM2.5 million as at June 30, 2010. The stabilisation in pricing for cocoa products, meanwhile, supports slight improvements in profitability. Overall, MARC expects improvements in the group's consolidated performance to continue into FY2011, noting the relatively small contribution of the smaller segments to group results.

TSH has continued to generate negative free cash flow as a result of its high capital spending, most of which relates to plantation-related capital and development expenditures. This has resulted in a deterioration of its leverage metrics, as reflected in the steady increase in its debt- to-equity ratio to 0.8 times as at end-June 2010. While MARC does not expect TSH's leverage to show meaningful improvement in the near to medium term, no further material deterioration in TSH's financial leverage is anticipated at current rating levels.

Major Rating Factors

Strengths

  • Uptrending fresh fruit bunch (FFB) production vis-à-vis its young but gradually maturing plantation profile in Indonesia, coupled with favourable FFB yields;
  • Ability to maintain positive operating cash flows in spite of commodities price fluctuations; and
  • Dynamic financial and resource allocation management.

Challenges/Risks

  • Cyclicality of the palm oil industry and its other commodity-based businesses;
  • Uneven global recovery leading to slower recovery of its non-key businesses; and
  • Growing exposure to the Indonesian plantation assets increases sovereign and currency risks.
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