TSH Sukuk Musyarakah Sdn Bhd - 2014

MARC has affirmed its rating of AAAIS(fg) on TSH Sukuk Musyarakah Sdn Bhd’s (TSH Musyarakah) RM100.0 million Guaranteed Islamic Medium-Term Notes programme (Sukuk Musyarakah) with a stable outlook. The affirmed rating and outlook are based on the unconditional and irrevocable financial guarantee insurance provided by Danajamin Nasional Berhad (Danajamin) which carries MARC’s financial strength rating of AAA/stable. TSH Musyarakah is a special purpose funding vehicle incorporated to facilitate the issuance of notes under the Sukuk Musyarakah for its parent company, TSH Resources Berhad (TSH). As at March 3, 2015, TSH Musyarakah has an outstanding balance of RM50.0 million.

TSH’s standalone credit profile reflects its improving operating performance and operating cash flow; positives are moderated by subdued crude palm oil (CPO) prices, continuing negative free cash flow (FCF) and exposure to regulatory and currency risks. TSH is a mid-sized plantation group involved mainly in oil palm cultivation and to a lesser extent bio-integration, wood products and cocoa segments. TSH’s oil palm segment contributed about 90% to consolidated revenues over the last three years. The robust growth in fresh fruit bunch (FFB) from an improving tree maturity profile led to improved operating profits and cash flows for the unaudited financial year ended December 31, 2014 (FY2014). FFB production rose 18.0% y-o-y to 640,926MT (FY2013: 542,951MT). MARC expects FFB production growth to further strengthen as immature and matured trees enter their prime age in the intermediate term. As at 9MFY2014, palm trees of prime age and young matured palm trees make up 24.9% and 32.8% respectively of its 39,218 planted hectarage.

MARC notes that TSH’s land bank in Malaysia is fully planted and new planting is being undertaken in Kalimantan Indonesia, where 55,936ha remain unplanted as at 9MFY2014. The recent acquisition of Icon Field Ventures Sdn Bhd has added another 9,000ha in Kalimantan to TSH’s land bank. The group has moderated its planting programme to approximately 4,000ha annually to balance between its expansion policy and cash flow management. MARC also notes that TSH’s increasing reliance on Indonesia for growth will continue to subject the group to regulatory and foreign currency risks.

For FY2014, TSH’s revenues increased 6.1% y-o-y to RM1,079.9 million (FY2013: RM1,017.8 million) on higher production volume in spite of a 3.8% y-o-y decline in average CPO price to RM2,165/MT (FY2013: RM2,251/MT). Operating profit margins improved to 17.4% (FY2013: 15.5%) resulting in a consolidated profit before tax of RM170.8 million as compared to RM164.5 million in FY2013. The improved financial performance was attributed mainly to the revenue and earnings growth of the oil palm segment which has more than offset the lacklustre financial performance of other segments. TSH’s cost management efforts have resulted in an average CPO production cost of RM912/MT for its Malaysian operations and RM1,122/MT for its Indonesian operations in 9MFY2014. TSH’s wood segment, which was affected by lower demand from Europe, recorded a 14.9% y-o-y decline in revenue to RM43.5 million and a marginal loss in FY2014. The group’s cocoa segment registered a 6.4% y-o-y decrease in revenue to RM60.8 million but recorded a 143.2% y-o-y increase in operating profit of RM15.7 million in FY2014 on higher average selling prices of expeller butter.

MARC observes that FCF has remained negative since FY2012 although the deficits have shrunk from RM204.0 million to RM151.3 million in FY2014. Aside from TSH’s tree planting programme, capex on construction of its pulp and paper plant which is in the commissioning stage and ongoing capital investment requirements in its Indonesian estates continue to drain cash flows. While MARC expects operating cash flows to continue to grow on the back of higher FFB yields and production volumes, FCF generation could remain pressured by land acquisitions, tree planting as well as associated plant and machinery expenditures.

MARC notes that TSH may face some pressure on its USD-denominated borrowings in light of the weakening ringgit. The group has outstanding USD110.2 million borrowings as at end-FY2014 with USD17.6 million instalment payments due in late-2015. MARC acknowledges that the exposure to ringgit weakness is mitigated by the fact that CPO price is determined by reference to the USD. In addition, TSH has sufficient liquidity to meet short-term obligations, supported by unutilised credit lines of RM464.8 million (including RM160.0 million under the rated programmes) as at 9MFY2014. The group has cash balances of RM55.1 million as at end-FY2014. Additionally, TSH has a reasonably diversified debt maturity profile that is spread out through 2019. The group’s debt-to-equity (DE) ratio improved marginally to 0.79x as at end-FY2014 from 0.80x as at end-FY2013 after an increase in both total borrowings and equity base.