TSH SUKUK MURABAHAH SDN BHD - 2015

MARC has assigned ratings of MARC-1_IS /AA-_IS to special purpose entity TSH Sukuk Murabahah Sdn Bhd’s (TSH Murabahah) proposed RM50.0 million Islamic Commercial Paper (ICP) and RM150.0 million Islamic Medium-Term Note (IMTN) programmes. The ratings carry a stable outlook. The proceeds from the issuances under the proposed programmes will be utilised by its parent company, TSH Resources Bhd (TSH), for new tree planting activities primarily in Indonesia and to meet working capital requirements. In addition to TSH Murabahah, TSH has two other wholly-owned special purpose funding vehicles: TSH Sukuk Ijarah Sdn Bhd (TSH Ijarah); and TSH Sukuk Musyarakah Sdn Bhd (TSH Musyarakah). The full list of issuances of TSH Ijarah and TSH Musyarakah is provided at the end of the section.

The assigned ratings on TSH Murabahah incorporate TSH’s good operating track record in its key palm oil segment, stemming from stronger fresh fruit bunch (FFB) yields and higher operating efficiency. These factors have supported the group’s overall profitability in the current subdued crude palm oil (CPO) price environment. The palm oil segment contributed 91% (RM375.4 million) to the group’s revenue and 93% (RM76.7 million) of segmental profit for the first half of the year ended June 30, 2015 (1H2015). MARC notes TSH’s FFB yield of 23.4 metric tonne per hectare (MT/ha) was higher than the domestic industry average as at end-2014. The group’s tree maturity profile is considered favourable as “immature” and “young matured” trees will comprise 37.2% and 29.3% of the total planted area respectively by end-2015 (end-2014: 35.8%; 32.3%).

TSH’s unplanted land remains sizeable, comprising 67,160 ha (or 62%) of its total land bank of 109,346 ha as at end-June 2015. MARC notes that TSH plans to increase its planted land by an average of 5,167 ha per annum from 2016 through 2020 and expects capital expenditure associated with TSH’s tree planting activities to continue to weigh on the group’s financial metrics over the medium term, particularly its free cash flow generation. In the current financial year, TSH plans to undertake new tree planting on 4,000 ha in Indonesia and 1,000 ha in its newly acquired plantation land in Kalabakan, Sabah. The 5,000 ha Kalabakan land is held by Rinukut Sdn Bhd which is 70%-owned by TSH. Notwithstanding the additional Kalabakan land, TSH’s planted areas in Malaysia comprise only 14% of its total planted area, with the remaining in Indonesia.

MARC is of the view that TSH’s sizeable operations in Indonesia pose significant regulatory risks for the group; any policy decisions, particularly on CPO exports and ownership, could impact the group’s credit profile. The Indonesian government’s recent decision to introduce an export levy on refined CPO to fund the country’s B15 biodiesel programme may weaken profit margins that could lead to a reduction of about 9.7% in TSH’s pre-tax profit projections over the near term should local refiners pass on the entire levy to the company. However, over the longer term, TSH could benefit if demand for CPO increases as the B15 programme gains traction.

For 1H2015, revenue declined by 30% y-o-y to RM412.2 million and operating profit by 40.8% to RM64.9 million (1H2014: RM588.9 million; RM109.5 million). The weaker performance is due to the lower average selling price of CPO at RM2,152/MT in 1H2015 (1H2014: RM2,501/MT) and the decline in FFB production by 6.9% y-o-y to 297,221 MT (1H2014: 319,417 MT) arising from dry spells. MARC notes that TSH’s cost of production remains favourable relative to its peers, standing at RM904/MT in Malaysia and RM1,123/MT in Indonesia as at end-2014. The group’s other business segments, namely wood and cocoa, continue to generate modest revenue streams. The wood segment posted revenue and losses of RM18.1 million and RM1.0 million respectively while the cocoa segment registered revenue and profit of RM18.7 million and RM6.4 million respectively in 1H2015.

MARC observes that the free cash flow (FCF) deficit widened to RM134.1 million in 1H2015 on planting activities and the construction of a 45,000MT palm oil mill in Indonesia that is slated to be completed by 2016. The persistent negative FCF remains a negative rating factor. TSH has budgeted capex averaging RM174.2 million per annum between 2015 and 2020. Given the planned capex commitments, any further debt-funded acquisitions to increase TSH’s land bank would further strain its balance sheet. MARC notes that TSH’s debt levels have risen in recent years, with the debt-to-equity (DE) ratio at 0.94x in 1H2015 (2014: 0.80x), and would potentially increase to 1.09x upon full drawdown of the proposed rated programmes. The rating agency expects the group to employ greater discipline on debt management to restore its leverage back to levels below 0.85x over the near term. MARC also expects management to be flexible on its planting activities such that its credit metrics are in line with the current rating band.

Under TSH’s base case projections, the average and minimum finance service cover ratios (FSCR) are 1.96x and 1.90x respectively while the DE ratios are expected to range from 0.53x to 0.80x. MARC’s sensitivity analysis shows that TSH’s ability to generate requisite cash flows to pare down its debt largely depends on a CPO price movement above the RM2,382/MT level. The group has cash and bank balance of RM45.5 million with unutilised credit lines of RM482.4 million (including RM110.0 million from the rated programmes) as at end-1H2015. MARC considers TSH’s liquidity to be sufficient to meet its short-term obligations.

The stable outlook reflects MARC’s expectations that key credit metrics will improve over the near term and the group will continue to maintain cost efficiency and healthy production yields. Downward rating pressure will arise if credit metrics further weaken, or if cash flow generation is affected by a significant decline in CPO prices and/or if any further debt-funded acquisitions are undertaken.

• TSH Ijarah has outstanding Islamic notes amounting to RM240 million and is rated at MARC-1IS /AA-IS with a stable outlook; and
• TSH Musyarakah has outstanding Danajamin-guaranteed Islamic notes of RM50 million and is rated at AAAIS(fg) with a stable outlook.

Strengths

• Healthy maturity profile of palm oil trees to support production growth; and
• Improving operating profitability derived from prudent cost management.

Challenges/Risks

• Subdued crude palm oil price environment;
• Pressure on cash flow retention from plantation expansion activities;
• Increasing debt levels; and
• Exposed to regulatory and exchange rate risks.