CREDIT ANALYSIS REPORT

TSH SUKUK MURABAHAH SDN BHD - 2021

Report ID 60538900358 Popularity 50 views 8 downloads 
Report Date Oct 2021 Product  
Company / Issuer TSH Sukuk Murabahah Sdn Bhd Sector Plantations
Price (RM)
Normal: RM500.00        
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Rationale
Rating action     
MARC has affirmed its rating of A+IS on TSH Sukuk Murabahah Sdn Bhd’s Sukuk Murabahah RM150 million Medium-Term Notes (Sukuk Murabahah IMTN) Programme and revised the rating outlook to positive from stable. Concurrently, the rating agency has also affirmed its rating of MARC-1IS on TSH Sukuk Murabahah’s RM50 million Sukuk Murabahah Commercial Papers (Sukuk Murabahah ICP) Programme with a stable outlook. 

Rating assessments on TSH Sukuk Murabahah and TSH Resources Bhd’s (TSH) other funding vehicle TSH Sukuk Ijarah Sdn Bhd are based on the strength of their parent TSH which has provided an irrevocable and unconditional undertaking to meet the purchase obligations of both its subsidiaries.

Rationale     
The affirmed rating is mainly driven by TSH’s lengthy track record in oil palm cultivation and favourable tree maturity profile that have yielded strong production metrics. With 45% of total planted area of 42,470 ha comprising prime age trees and another 43% comprising trees that will progressively enter prime age over the next six years, earnings growth could be expected in the medium term. Longer term growth prospects are underpinned by the remaining unplanted 57,000 acres, largely in Kalimantan, Indonesia.

The long-term rating outlook revision to positive is premised on the TSH group’s improved financial performance on the back of the resurgent crude palm oil (CPO) price environment since 4Q2020 that has strengthened its credit metrics. In 1H2021, TSH recorded a higher average CPO price of RM3,242/MT (2020: RM2,453/MT) that contributed to a 17.8% y-o-y increase in revenue to RM551.5 million. During this period, cash flow from operations (CFO) grew sharply by 31.2% y-o-y to RM159.2 million. Accordingly, CFO interest and debt coverages improved to 7.6x and 0.2x (2019: 3.5x; 0.1x). In the recent past, TSH has been moderating its capex spending which has led to higher free cash flow (FCF) of RM120.9 million in 1H2021 (1H2020: RM97.6 million). We view that the stronger performance will provide headroom to undertake additional planting; TSH has earmarked RM80.5 million in capex for 2021. 

We note that TSH’s group borrowings stood at RM1.2 billion as at end-June 2021, translating to a gross debt-to-equity (DE) ratio of 0.74x (2019: 0.91x). We also understand that TSH is selling a combined 3,007 ha of plantation land in Kinabatangan, Sabah, together with a palm oil mill for RM248.0 million. Proceeds from  the disposal, which is expected to be  completed by 1Q2022, will be used to pare  down borrowings, resulting in the group’s gross leverage position potentially declining to about 0.6x (1H2021:0.74x). While the disposal will reduce the total planted area by about 6.9% and fresh fruit bunch (FFB) production recorded in 2020 by 5.6%, the decline in earnings is expected to be offset by the improved CPO price environment and lower interest expense. 

For 1H2021, FFB production grew by 13.2% y-o-y to 483,338 MT. This translates to FFB yield of 11.9MT/ha (or 23.8MT/ha on an annualised basis) which remains one of the highest in the industry. This was in part due to a healthy tree maturity profile and TSH’s expertise in plantation management.

The total notes outstanding are RM25.0 million under the Sukuk Ijarah IMTN programme and RM200.0 million under the Sukuk Murabahah IMTN and Sukuk Murabahah Commercial Papers (ICP) programmes as at September 30, 2021.

Rating outlook     
The positive outlook considers an overall improvement in TSH’s financial metrics particularly earnings generation and leverage position over the near term. 

Rating trajectory

Upside scenario     
The rating could be upgraded if the group sustains its production metrics and financial performance, and reduces its leverage to about 0.7x.

Downside scenario     
Downward rating pressure could occur if liquidity weakens substantially and/or borrowings increase such that leverage position weakens.

Key strengths
Longstanding track record in oil palm cultivation 
Favourable maturity profile of oil palm trees supportive of FFB yield
Expected sharp improvement in leverage position

Key risks
Cross-border risk from its operations in Indonesia 
CPO price volatility



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