CREDIT ANALYSIS REPORT

TSH SUKUK IJARAH SDN BHD - 2018

Report ID 5843 Popularity 972 views 70 downloads 
Report Date Dec 2018 Product  
Company / Issuer TSH Sukuk Ijarah Sdn Bhd Sector Plantations
Price (RM)
Normal: RM500.00        
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Rationale

MARC has affirmed its rating of AA-IS on TSH Sukuk Ijarah Sdn Bhd’s (TSH Ijarah) RM300.0 million Sukuk Ijarah Medium-Term Notes (Sukuk IMTN) programme.

TSH Ijarah is one of two special purpose funding vehicles set up by its parent, TSH Resources Berhad (TSH), a predominantly upstream crude palm oil (CPO) producer with majority of its oil palm plantations located in Kalimantan, Indonesia.

The rating outlook is maintained at stable. Nonetheless, TSH’s financial performance is expected to remain under pressure in view of the prevailing weak CPO price level and given the challenging outlook for the palm oil industry over the near term. TSH’s high leverage position remains a key concern; its debt-to-equity (DE) ratio rose to 1.05 times in 1H2018, due largely to the impact from adopting Malaysian Financial Reporting Standards (MFRS) 116 and 141 that had resulted in an erosion of shareholders’ funds. Absent the MFRS adjustments, DE ratio would be 0.97x (2017: 0.96x).

The affirmed ratings, meanwhile, reflect TSH’s longstanding track record in oil palm cultivation and its healthy tree maturity profile which stands at an average of nine years. The age distribution indicates potentially higher yield of fresh fruit bunches (FFB) as 49.4% of its total planted area of 41,961 ha comprising immature and young matured trees will enter prime production age progressively over the next seven to eight years. This age distribution will also translate into lower average cost of production in the medium term.

For 1H2018, TSH’s FFB yields remained strong due to larger mature planted area, where tree of prime age rose by 29% to 18,268 ha from the previous corresponding period (2017: FFB yield: 24.5MT/ha). Accordingly, TSH’s production cost has improved although it remains higher-than-domestic peers as about 85% of production volume is in Indonesia where the production cost is higher. For 2017, the improved FFB yield and higher average selling CPO price of RM2,701/MT bolstered group’s operating profit to RM218.4 million and strengthened its cashflow metrics. However, as CPO price declined in 1H2018 with average selling price of RM2,299/MT, operating profit declined to RM66.2 million. Cash flow from operation (CFO) interest coverage decreased to 2.0x (2017: 5.8x). TSH expects its FFB production to improve in view of higher harvest from its Indonesian plantation in 2H2018. However, results for the full year 2018, are expected to be lower than that of 2017.

As at 1H2018, TSH’s total borrowings declined marginally to RM1.47 billion (2016: RM1.53 billion). The rating agency notes that the group’s high short-term debt of RM718.5 million (of which RM 120.5 million comprises the short-term portion of the long-term debt) poses liquidity risks given its modest cash position, although it has RM438.7 million in unutilised credit. TSH is currently refinancing about RM100 million of its short-term debt to a longer tenure. The group’s high leverage level has strained its cash flows, weakening its ability to weather through the volatile palm oil industry cycle. TSH is expected to manage its financial metrics by managing its capex, which has fallen from RM197.3 million in 2016 to RM165.8 million in 2017. Given the relatively young profile of its trees, the group does not expect to incur major capex for another 10 years.

MARC expects TSH’s borrowings to decline such that consolidated gearing level should reduce to about 0.8x in the near term. Conversely if TSH’s borrowing level continue to remain high without corresponding cash inflows to support its debt and cashflow metrics, the rating and/or outlook would be lowered.

Major Rating Factors

Strength

  • Healthy maturity profile of palm oil trees to support production growth.

Challenges/Risks

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