TSH Sukuk Ijarah Sdn Bhd - 2011

MARC has affirmed its ratings on TSH Sukuk Ijarah Sdn Bhd’s (TSH Ijarah) RM100.0 million Sukuk Ijarah Commercial Papers (Sukuk ICP) and RM300.0 million Sukuk Ijarah Medium Term Notes (Sukuk IMTN) Programmes at MARC-1IS /AA-IS with a stable outlook. The rating action affects outstanding notes of RM245.0 million issued under the rated programmes.

TSH Ijarah is a special purpose funding vehicle created to facilitate the issuance of notes under the rated programmes on behalf of parent 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 sukuk ratings of TSH Ijarah reflect the standalone credit profile of TSH and its standalone short and long-term senior debt ratings of MARC-1 and AA-. TSH’s standalone ratings incorporate the continued good performance of its oil palm plantation business, its sustained operating cash flow (CFO) generation and satisfactory debt service coverage on a consolidated basis. These credit strengths are moderated by the lacklustre operating performance of its wood products and cocoa business, its continuing negative free cash flow and the sensitivity of its financial performance to palm oil price cyclicality. The stable outlook reflects MARC’s expectation that TSH will continue to exhibit revenue and earnings growth as returns are generated from plantation capital expenditure made during earlier periods. MARC opines that TSH’s ability to generate positive free cash flow, improve its liquidity metrics and maintain its financial flexibility will depend on sufficiently supportive industry conditions as well as controlled plantation development expenditure on the part of the group.

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 its 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 ratings, which MARC has taken into consideration in attaching a stable outlook to the sukuk ratings of TSH Ijarah.

Major Rating Factors

Strengths

• 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.