CREDIT ANALYSIS REPORT

TSH Sukuk Musyarakah Sdn Bhd - 2011

Report ID 3923 Popularity 1665 views 163 downloads 
Report Date Mar 2011 Product  
Company / Issuer TSH Sukuk Musyarakah Sdn Bhd Sector Plantations
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Rationale

MARC has assigned a rating of AAAIS(fg) to TSH Sukuk Musyarakah Sdn Bhd’s (TSH Sukuk-M) RM100.0 million Islamic Medium Term Notes (IMTN) Programme. The rating carries a stable outlook. The assigned rating and outlook are underpinned by an unconditional and irrevocable Kafalah Guarantee provided by Danajamin Nasional Berhad (Danajamin) in relation to the IMTN Programme. MARC currently rates Danajamin’s financial strength as AAA/stable on the basis of its important role as Malaysia’s first and sole financial guarantee insurer, its status as a government-sponsored entity, its solid capital base, ample liquidity and conservative investment policy.

TSH Sukuk-M 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). Proceeds of the IMTN Programme will be used to finance the redemption of the group’s outstanding notes issued by TSH Sukuk Ijarah Sdn Bhd (TSH Sukuk-I), another special purpose funding vehicle wholly-owned by TSH. On November 26, 2010, MARC affirmed the ratings of TSH Sukuk-I’s RM400.0 million Sukuk Ijarah Commercial Papers/Medium Term Notes (Sukuk ICP/IMTN) Programme at MARC-1IS/AA-IS and revised the outlook on the ratings to stable from developing. Similar to TSH Sukuk-I, TSH Sukuk-M’s standalone creditworthiness is derived from the consolidated strength of the TSH group.

TSH derives the bulk of its revenue and earnings from its palm oil operations. For FY2010, palm oil operations generated about 83% of TSH's consolidated revenue (FY2009: 80%) and close to all of its pre-tax profits in both years. The group has rapidly expanded its plantation land area in recent years by acquiring plantation land in Kalimantan, Indonesia. As at September 2010, of its 27,130 hectares (ha) of planted oil palm land, approximately 50% comprise matured trees. The maturity profile of the group's planted oil palm estates is expected to generate average annual percentage increase of 25% in matured plantation and 38% in fresh fruit bunch (FFB) production between 2010 through 2013. The group’s internal plans are 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. MARC’s view is supported by an observed lower level of new planting in 2010 of 2,794 ha.

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. Segmental losses for the wood products and forestry operations of RM4.4 million in FY2010 (unaudited) against a RM1.5 million profit in FY2009 reflected lower selling prices and margins due to adverse currency movements, notably the strength of the ringgit against the euro and the US dollar. Furthermore, 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, on the other hand, fared better than expected in FY2010 (unaudited) with a segment profit of RM12.7 million (FY2009: segment loss of RM3.3 million), but continues to be challenged by soft demand and volatile raw material prices.

On a consolidated basis, group revenue for FY2010 declined year-on-year (y-o-y) by 7.2%, or RM70.6 million to RM909.7 million, mainly attributable to the cocoa division which saw its revenue declining by RM43.2 million (61% of RM70.6 million). Its major business division, the palm and bio-integration unit, saw a marginal 3.4% drop in revenue while the timber and wood products division’s revenue was almost flat. Although TSH’s consolidated revenue has been declining since FY2008, the group’s profitability has been improving. For FY2010, consolidated pre-tax profit increased 24.2% to RM106.7 million (FY2009: RM85.9 million, FY2008: RM82.3 million), its operating margin consequently widened to 12.7% (FY2009: 10.4%, FY2008: 7.2%). Apart from the favourable CPO prices and higher own/internal FFB production, the other factor contributing to improved profitability is the turnaround of its cocoa division, which reported a profit of RM12.7 million compared to a loss of RM3.3 million in FY2009 with the stabilisation of cocoa prices.

In the near term, MARC expects the palm oil plantation operations to continue benefiting from the favourable CPO demand and pricing environment. TSH will also be able to rely on its growing own/internal FFB production to sustain the positive momentum in revenue and earnings. Recovery in the timber and wood products business, however, is likely to be delayed as indicated by the higher cumulative loss recorded in its 4Q2010 results against 3Q2010. Meanwhile, the stabilisation of cocoa prices since 2Q2010 is still looking to support sustained improvements in profitability for the cocoa products segment.

Overall, MARC expects improvements in the group’s consolidated performance to continue into FY2011. Nonetheless, noteholders of TSH Sukuk-M will also be insulated from any downside risks in TSH’s consolidated credit profile by virtue of the guarantee provided by Danajamin. Any changes in the supported rating or rating outlook will be primarily driven by changes in Danajamin’s credit strength.

Major Rating Factors

Strengths

  • Guarantee by Danajamin in respect of profit and principal payment obligations;
  • Uptrending fresh fruit bunch (FFB) production vis-à-vis its young but gradually maturing plantation profile in Indonesia, coupled with favourable FFB yields; and
  • Ability to maintain positive operating cash flows in spite of commodities price fluctuations.

Challenges/Risks

  • Cyclicality of its palm oil and other commodity-based businesses;
  • Slow US and European economic recovery hampers growth of its non-key businesses; and
  • Growing exposure to the Indonesian plantation assets increases sovereign and currency risks.
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