TSH SUKUK IJARAH SDN BHD - 2015

MARC has affirmed its ratings of MARC-1_IS /AA-_IS 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 with a stable outlook. The ratings affect the outstanding amount of RM270.0 million as at December 28, 2015 under the rated programmes. TSH Ijarah is a special purpose vehicle to facilitate funding for its parent, TSH Resources Berhad’s (TSH) crude palm oil (CPO) operations.

TSH’s credit profile remains supported by the group’s relatively low production costs, favourable tree maturity profile and adequate financial flexibility. These factors notwithstanding, TSH’s credit metrics have been affected by weak CPO prices, increased debt to fund capital expenditure and recent land acquisitions. In affirming TSH’s ratings, MARC expects the group to exercise greater discipline in relation to its capital expenditure programme and undertake initiatives to restore its credit metrics to a more prudent historic level.

For the unaudited 9M2015, TSH’s fresh fruit bunch (FFB) yields and production volumes declined to 13.6 MT/ha and 449,988 MT respectively (9M2014: 17.6 MT/ha; 483,048 MT) owing mainly to adverse weather conditions. These factors, combined with a lower CPO average selling price of RM2,099/MT during the period, contributed to the steep decline in revenue and operating profit to RM593.6 million and RM82.4 million respectively. Cash flow from operations (CFO) fell to RM16.9 million in 9M2015 on lower profits and higher working capital requirements. MARC expects TSH’s performance to improve over the near term on higher production volumes and stabilising CPO prices. Additionally, its output would also be supported by a healthy tree maturity profile of an average 6.9 years and by a sizeable 61.0% of its total planted area of 42,706 ha comprising mature and prime palm trees.

MARC notes that given TSH’s plantations are predominantly located in Indonesia, any major change in the Indonesian government’s regulatory policies on foreign ownership or investment activities in the country’s palm oil sector could pose a significant risk to the group’s operations. In addition to land acquisitions, capital expenditure incurred to fund its new palm oil mill investment in Indonesia and new planting contributed to higher negative free cash flow (FCF) of RM216.6 million (9M2014: negative RM67.3 million). TSH’s group borrowings rose to RM1.4 billion as at end-9M2015 (end-2014: RM1.0 billion), leading to a higher gearing of 1.0x. MARC understands the group has curtailed new planting activity as part of its measures to preserve liquidity. In addition, TSH’s moderately diversified debt maturity profile, with its long-term debt stretched over the next four years, offers some buffer to the group to strengthen its liquidity position from internally generated funds and a rationalised capital expenditure programme.

MARC notes that TSH has the financial flexibility to meet current maturities of long-term debt of RM156.0 million and USD24.1 million (or RM103.6 million assuming RM4.30/USD) by end-2016. Of the ringgit-denominated debt, RM115.0 million comprises IMTN under TSH Sukuk Ijarah, which is expected to be rolled over. In addition, the group has unutilised credit lines of RM407.9 million and cash reserves of RM50.2 million as at end-September 2015 as well as from the undrawn RM200.0 million ICP and IMTN under the recently established Sukuk Murabahah programme.

The stable outlook is premised on MARC’s expectations that TSH will adhere to prudent cash flow management by limiting capital expenditure. Additionally, TSH is expected to improve its leverage in the intermediate term to strengthen its balance sheet position. The ratings may come under pressure if earnings and cash flow decline beyond MARC’s expectations, resulting in a further weakening of the group’s credit profile.

Major Rating Factors

Strengths

• Healthy maturity profile of palm oil trees to support production growth; and
• Relatively low production costs.

Challenges/Risks

• Subdued crude palm oil price environment;
• Increasing debt levels; and
• Exposed to regulatory and exchange rate risks.