CREDIT ANALYSIS REPORT

TSH SUKUK IJARAH SDN BHD - 2019

Report ID 5950 Popularity 716 views 114 downloads 
Report Date Jun 2019 Product  
Company / Issuer TSH Sukuk Ijarah Sdn Bhd Sector Plantations
Price (RM)
Normal: RM500.00        
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Rationale

MARC has lowered TSH Sukuk Ijarah Sdn Bhd’s (TSH Ijarah) RM300.0 million Sukuk Ijarah Medium-Term Notes (Sukuk Ijarah IMTN) programme rating of AA-IS to A+IS. The rating outlook is stable.

TSH Ijarah is one of two special purpose funding vehicles set up by its parent, TSH Resources Berhad (TSH). The other funding vehicle is TSH Sukuk Murabahah Sdn Bhd (TSH Murabahah), which has RM50.0 million Sukuk Murabahah Commercial Papers (Sukuk Murabahah ICP) and a RM150.0 million Sukuk Murabahah Medium-Term Notes (Sukuk Murabahah IMTN) programme. As TSH has provided an irrevocable and unconditional undertaking to meet the financial obligations under the issuances, the rating reflects its credit profile.

The rating downgrade takes into consideration TSH’s continued high leverage position that the group has not been able to address, given its modest cash flow generation that has been hampered by low crude palm oil (CPO) prices in recent years. TSH’s key credit metrics, in particular its debt-to-equity (DE) ratio, have fallen below the threshold for a AA-IS rating. The adoption of MFRS 116 and 141 which had resulted in an erosion in shareholders’ funds, has affected plantation companies, including TSH. Without MFRS adjustments, TSH’s DE ratio is still deemed high at 0.89x (with MFRS adjustments, TSH’s DE ratio is higher at 0.97x) as at end-2018. The rating agency is of the view that given CPO prices are expected to remain rangebound between RM2,100/MT and RM2,300/MT over the near term, the group may find it challenging to pare down its borrowings.

As a predominantly upstream CPO producer, TSH’s financial performance is closely linked to CPO prices. For 2018, revenue declined by 16% y-o-y to RM906.4 million, mainly attributed to a 22.8% y-o-y fall in its average CPO selling price to RM2,086/MT. Accordingly, cash flow from operations (CFO) declined to RM172.9 million from RM247.0 million in the previous year, leading to lower CFO interest coverage and debt coverage at 3.9x and 0.09x. MARC also notes with concern the group’s high short-term borrowings of RM663.1 million, which accounted for 45.6% of total borrowings. The current portion of term loans and Sukuk Ijarah IMTN amount to RM123.7 million. This has risen due to TSH’s strategy of utilising short-term funding to maximise cost savings; nonetheless, MARC has observed that the group has made some efforts to rebalance its funding profile.

TSH’s management has been managing its overall liquidity position by moderating its capex spending, which has been confined to replanting. TSH has a favourable tree maturity profile which stood at an average of 9.2 years as at end-2018. The healthy tree maturity profile demonstrates potentially higher fresh fruit bunches (FFB) yield as 49.9% of its total planted area of 42,077ha comprising immature and young matured trees will enter prime age progressively over the next six to seven years. For 2018, TSH’s FFB yield improved to 25.4MT/ha (2017: 24.5MT/ha) while FFB production volume rose by 20.8% to 857,802 MT.

Nonetheless, as about 90.5% of TSH’s land bank of 99,524ha and 85.3% of TSH’s planted area of 42,077ha are in Kalimantan, Indonesia, the group remains exposed to cross-border risk. The total notes outstanding as at end-April 2019 are RM300.0 million under the Sukuk Ijarah IMTN programme and RM150.0 million under the Sukuk Murabahah IMTN programme.

Major Rating Factors

Strength

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

Challenges/Risks

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