CREDIT ANALYSIS REPORT

TSH SUKUK MUSYARAKAH SDN BHD - 2016

Report ID 5345 Popularity 868 views 4 downloads 
Report Date Nov 2016 Product  
Company / Issuer TSH Sukuk Musyarakah Sdn Bhd Sector Plantations
Price (RM)
Normal: RM500.00        
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Rationale

MARC has affirmed its rating of AAAIS(fg) on special purpose vehicle 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) on which MARC maintains an insurer financial strength rating of AAA/stable. As at September 15, 2016 the outstanding balance under this programme is RM50.0 million. TSH Musyarakah is a special purpose vehicle set up to facilitate funding for its parent TSH Resources Berhad’s (TSH) crude palm oil (CPO) operations.

On a standalone basis, TSH exhibits a healthy cash flow generating ability on account of the group’s relatively low production costs and healthy tree maturity profile. Moderating its credit strengths, however, are TSH’s high leverage position and the susceptibility of TSH’s operating and financial performance to volatile CPO prices and foreign exchange risks.

TSH is predominantly an upstream CPO producer, with palm products contributing 85.0% of consolidated revenue of RM414.7 million in 1H2016 (unaudited) while its two other segments, wood products/reforestation and cocoa manufacturing/bio-integration, contributed 6.9% and 8.1% respectively. During 1H2016, TSH recorded a higher average CPO selling price of RM2,309/MT, although this was somewhat offset by lower crop production of 252,193 MT (1H2015: RM2,152/MT; 297,221 MT). Crop production was affected by fruiting delays due largely to the El Nino phenomenon, leading to a lower fresh fruit bunch (FFB) yield of 7.4 MT/ha in 1H2016 (1H2015: 9.1 MT/ha). As a result of the lower yield, TSH’s cost of production increased to RM1,097/MT in Malaysia and RM1,641/MT in Indonesia in 1H2016 (1H2015: RM993/MT; RM1,378/MT). Its oil extraction rate (OER) of 20.7% is marginally above the industry average of 20.0%. MARC expects crop production to improve in the coming quarters from the delayed fruiting as weather patterns return to normal after El Nino ended in June 2016.

MARC also expects future cash flow generation from TSH’s oil palm plantations to improve based on its favourable tree maturity profile with an average age of 8.0 years; with 57.5% of the planted area comprising immature and young mature trees, yields will increase over the intermediate term. Currently, only about 34.4% of the palms are at prime age. MARC notes that TSH benefits from the low cost of land given that a significant portion was acquired much earlier; however, the location of 91.4% of the total land bank (109,346 ha) and 85.2% of the total planted area (41,763 ha) in Indonesia poses cross-border risk. The risk is mitigated by the group’s established operations in the country.

Since the last rating review, TSH has rationalised its capex programme by refraining from acquiring any new assets and limiting new planting activities. As at end-September 2016, TSH planted 45 ha, and has plans to plant another 50 ha by end-2016, 500 ha in 2017 and 1,500 ha in 2018. As such, TSH’s free cash flow (FCF) narrowed to negative RM25.6 million in 1H2016 (2015: negative RM242.2 million), aided by improved cash flow from operations (CFO) of RM67.4 million (2015: RM25.0 million). This notwithstanding, given that TSH’s total planted area comprises only 38.2% of the total land bank, any increase in the pace of planting activities would increase its funding needs.

In 1H2016, TSH issued RM150.0 million IMTNs through a funding vehicle, Sukuk Murabahah Sdn Bhd, increasing its borrowings to RM1,544.7 million. The proceeds of the issuance are largely expected to repay short-term debt. TSH’s pro-forma DE would be 0.92 times, unchanged from end-2015. Of the total borrowings, about 37.1% is in the form of revolving credits and trade facilities which are regularly rolled over and self-liquidated with trade receivables and inventories. Another 19.0% (or about RM292.9 million) consists of current maturities and includes RM165.0 million IMTN under the rated TSH Ijarah which are likely to be reissued upon maturity. With the paring down of short-term debt and terming out of current maturities, TSH’s debt maturity profile will be better aligned with its cash flow generation. The group’s financial flexibility is deemed sufficient as reflected by its unutilised credit facilities totalling RM605.0 million.

For 1H2016, TSH’s profit before tax of RM81.1 million (1H2015: RM23.9 million) was supported by a forex gain of RM29.7 million compared to a loss of RM34.0 million in 1H2015 stemming from the group’s US dollar-denominated loans of RM492.0 million. TSH Ijarah’s RM100.0 million Sukuk Ijarah Commercial Papers programme was cancelled in July 2016; the outstanding amount under the Sukuk IMTN programme stood at RM265.0 million as at September 15, 2016.

Sukukholders are insulated from any downside risks associated with TSH’s consolidated credit profile by virtue of the financial guarantee provided by Danajamin. Any changes in the rating/outlook will be driven by changes in Danajamin’s credit strength.

Major Rating Factors

Strengths

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

Challenges/Risks

  • Volatile crude palm oil prices;
  • High debt levels; and
  • Cross-border regulatory and exchange rate risks.
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