TSH Sukuk Ijarah Sdn Bhd - 2012

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 RM300.0 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 its 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 more than 92% of its revenue and earnings derived from its palm oil-based operations during the financial year ended 2012.

The affirmed ratings take into account TSH’s lower reported earnings for 2012 which has resulted in weaker operating margins and interest coverage measures. TSH’s liquidity has also tightened as a result of its reduced cash flow from operations (CFO) and persistently high plantation development capex. The ratings and outlook factors in an improvement in TSH’s profitability and cash flow generation in 2013, driven by a recovery in fresh fruit bunch (FFB) output. MARC notes that TSH’s 2012 results were affected by weaker crude palm oil (CPO) prices as well as a decline in FFB output.

TSH’s FFB production decreased by 5.1% to 283,908 metric tonnes (MT) during 9M2012 compared to the corresponding period of the previous year. The lower FFB output was due to tree stress following a bumper harvest in 2011. Overall, TSH’s FFB yield decreased to 15.3 MT per ha in 9M2012 from 15.8 MT per ha in 9M2011. Declining CPO prices exacerbated the impact of falling FFB output on TSH’s revenue and earnings during the period due to slower demand for CPO from its main export markets including China, Europe, India and the US. Average CPO price dropped 5.2% to RM2,696 per MT during 9M2012 (9M2011: RM2,843 per MT), weighed down by lower export demand. 

TSH’s FFB output has started to pick up from 4Q2012 on the back of recovery from tree stress and new oil palm acreage coming into maturity. The group’s total mature hectarage increased by 13.4% to 18,176 ha in 9M2012 (2011: 16,033 ha) attributable to the group’s planting activities in the previous years. The group’s planted area increased by 10.2% to 32,530 ha as of September 2012 compared to 29,522 ha as at end-December 2011. As at September 30, 2012, 33% of the group’s total land bank is already planted, of which 56% represents mature hectarage.

The segment losses of TSH’s wood products and cocoa manufacturing divisions were also a drag on its performance. Both segments registered lower production during 9M2012 because of weak export demand.

The group posted a significantly lower pre-tax profit of RM99.5 million (2011: RM161.9 million) on a 13.3% year-on-year decline on revenue to RM983.7 million (2011: RM1,134.2 million). A more pronounced decline was observed in the group’s cash flow from operations (CFO) which dropped to RM49.1 million (2011: 179.7 million). Consequently, the group’s consolidated cash flow debt and interest coverage metrics have fallen below MARC’s expectations for the current ratings. MARC also notes that TSH’s continued high plantation development capex has continued to weigh on the group’s liquidity and leverage. The group registered a larger negative free cash flow of RM205.4 million in 2012 while its debt-to-equity ratio deteriorated to 0.99x as at 2012 (2011: 0.78x).

The stable outlook reflects MARC’s view that the strength of TSH’s business profile and financial flexibility, particularly its ability to roll over maturing debt should continue to support its creditworthiness. Notwithstanding TSH’s recent underperformance, the stable outlook reflects MARC’s expectations that its profitability and cash flow generation should recover meaningfully in 2013 to support an improvement in TSH’s credit metrics. Rating stability also depends on TSH strengthening its liquidity position. A weaker-than-expected operating performance and additional debt without a commensurate increase in cash flow will exert pressure on the ratings. 

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