CREDIT ANALYSIS REPORT

TSH Sukuk Musyarakah Sdn Bhd - 2011

Report ID 4217 Popularity 1566 views 97 downloads 
Report Date Apr 2012 Product  
Company / Issuer TSH Sukuk Musyarakah Sdn Bhd Sector Plantations
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Rationale

MARC has affirmed its rating on TSH Sukuk Musyarakah Sdn Bhd’s (TSH Musyarakah) RM100.0 million Islamic Medium Term Notes (IMTN) Programme at AAAIS(fg) with a stable outlook. The rating action affects outstanding notes of RM50.0 million issued under the rated programme.

TSH Musyarakah is a special purpose funding vehicle created to facilitate the issuance of the notes under the rated programme on behalf of plantation-based company, TSH Resources Berhad (TSH or the group). The group is involved in oil palm cultivation and bio-integration, wood product manufacturing and trading, and cocoa manufacturing and trading, with the bulk of its revenue and earnings derived from its palm oil-based operations.

The affirmed rating and outlook of TSH Musyarakah reflect an unconditional and irrevocable financial guarantee insurance policy provided by Danajamin Nasional Berhad (Danajamin) in relation to the rated programme. The supported rating is premised on Danajamin’s financial strength, which MARC has rated AAA/stable on the basis of its strong capital resources and claims-paying ability relative to its risk exposure, and its status as a government-sponsored financial guarantee insurer (FGI).

TSH’s strong operating profitability and financial position have been largely driven by its plantation business in recent years. Based on unaudited results, TSH’s oil palm plantation business contributed 90% of consolidated revenue (FY2010: 83%), and nearly all of consolidated profit for the financial year ended December 31, 2011 (FY2011). MARC notes the robust growth in TSH’s fresh fruit bunch (FFB) production which grew by 16%, 21% and 43% in FY2009, FY2010 and FY2011 respectively. As at December 31, 2011, its mature hectarage accounted for about 54% of its total planted hectarage while 46% of its planted hectarage comprises palm trees aged below four years. The maturity profile of the group's planted oil palm estates is expected to provide an annual 18.5% and 21% increase in mature hectarage and FFB production respectively in the near-to-intermediate term. The focus of the oil palm segment’s expansion activity has been in Indonesia, which accounts for 95% of the group’s total land bank of 98,454 hectares (ha) as at end-2011. Approximately 70% of the group’s landbank is unplanted. In this context, MARC notes that the group has exercised prudence in its planting programme to forestall deterioration in TSH’s standalone credit metrics.

TSH’s revenue for FY2011 increased by 26.4% to RM1.15 billion (FY2010: RM908.4 million) while its pre-tax profit increased by 54.2% to RM162.4 million (FY2010: RM105.3 million). Operating profit margins also continued to improve year-on-year to 14.5% in FY2011 from 12.6% in FY2010 and 10.4% in FY2009. The improved financial performance was attributable solely to the revenue and earnings growth of palm oil plantation business which has more than offset the lacklustre financial performance of other divisions. Revenue from the wood products continued to decline year-on-year in FY2011, falling to RM49.6 million from RM66.6 million in FY2010, with segment losses widening to RM5.2 million (FY2010: -RM4.4 million). Revenue from the cocoa division also declined to RM63.1 million from RM85.4 million in FY2010, resulting in lower profit of RM2.1 million (FY2010: RM8.8 million). Both these divisions are export-based, with significant exposure to the Europe and US markets, which have been experiencing challenging economic conditions.

TSH’s free cash flow remained negative in FY2011; however, the deficit was smaller than previous years at RM3.7 million compared to negative RM26.6 million the year before. The group has been moderating its budgeted 5,000 ha per year oil palm planting programme to ease pressure on its leverage and cash flow metrics. The group’s debt-to-equity ratio, meanwhile, improved to 0.78 times (x) as at end-2011 from 0.85x on account of internal capital generation during the year. As in previous years, the group continues to exhibit a strong commitment to preserve its standalone credit profile.

Sukukholders of TSH Musyarakah are nonetheless, 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 rating/outlook.

Major Rating Factors

Strengths

  • Guarantee by Danajamin in respect of profit and principal payment obligations;
  • Upward trend in fresh fruit bunch (FFB) production from maturing Indonesian plantations profile; and
  • Prudent financial management.

Challenges/Risks

  • Cyclical nature of the palm oil industry and other commodity-based industries; and
  • Growing exposure to the Indonesian plantation operations poses increased sovereign and currency risks.
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