MARC Ratings has assigned a rating of AA-_IS to FGV Holdings Berhad’s (FGV) Sukuk Murabahah Programme of up to RM3.0 billion. The then unrated programme was established in December 2021 with a limit of RM500.0 million and will be upsized to the current limit. The outlook on the rating is stable. 

The assigned rating incorporates a rating uplift based on MARC Ratings’ assessment on the Federal Land Development Authority’s (FELDA) support to FGV given their significant operational and financial linkages. FELDA is a statutory body established under the Land Development Ordinance (now Land Development Act 1956) to support farming communities by providing land and financial assistance for cultivation. FGV, in which FELDA has 81.9% interest, is the commercial arm of the parent and was set up to purchase and process fresh fruit bunches (FFB) and other agricultural crops from smallholders and settlers under the FELDA programme. FGV also cultivates oil palm plantations on FELDA’s land under a long-term lease agreement.

FGV’s standalone rating reflects its sizeable oil palm plantation, improving tree maturity profile, and healthy balance sheet. This rating is moderated by land lease termination risk, comparatively higher production cost that has led to low-to-moderate operating margin, and susceptibility to crude palm oil (CPO) price volatility. 

Listed on Bursa Malaysia, FGV is currently the second-largest palm oil producer domestically, accounting for about 15% of total annual CPO production in Malaysia and 4% globally in 2022. Its total landbank stood at about 439,000 ha, of which about 80% is leased from FELDA for a period of 99 years until 2111 for an annual lease payment of RM248 million, which in turn increases its overall production cost. Of its 333,764 ha of cultivated oil palm plantation land as at end-September 2023, about 60% is in Peninsular Malaysia, 34% in Sabah, and the remaining in Sarawak and Kalimantan, Indonesia. In addition to oil palm, it also cultivates other crops including rubber, although the revenue contribution is small. 

MARC Ratings notes that FGV’s FFB production of about 14.0 million MT annually mainly comes from external sources (40% from FELDA smallholders and 30% from third-party plantations); only 30% is from its leased land. As such, a substantial portion of CPO sales are done on spot basis, compared to other plantation players that can transact more in forward contracts. Accordingly, FGV’s performance is more vulnerable to CPO price movements. In terms of average oil extraction rate (OER), FGV’s 20.5% in 9M2023 is in line with the Malaysian industry average.

The rating agency views FGV’s accelerated replanting programme would improve its average tree age profile. It aims to improve the average palm age from 12.8 years as at end-September 2023 to 10.2 years by 2025; it has budgeted RM460 million p.a. for this purpose over the next two years. 

For 9M2023, group performance was mainly impacted by the decline in its average CPO price to RM3,948/MT (9M2022: RM4,989/MT), resulting in 28.1% y-o-y decline in revenue to RM13.9 billion. FFB yield was also 6.6% y-o-y lower at 9.69 MT/ha due to lower fertiliser application, impacted by prolonged labour shortage. Pre-tax profit fell by 89.4% y-o-y to RM157.0 million largely due to a 38.5% y-o-y rise in production cost to RM2,944/MT. The sharp increases in fertiliser and labour costs during the period as well as the hilly terrain of 36% of its planted area which made harvesting more challenging contributed to the high production cost.

MARC Ratings notes group borrowings rose to RM3.5 billion as at end-September 2023, translating to a gross debt-to-equity (DE) ratio of 0.46x (2022: 0.35x). Short-term financing which accounted for 78% of total borrowings was related to trade financing. The group is seeking to rebalance its debt profile by refinancing its short-term obligations from the drawdown under the rated programme. Under the group’s projections, it is expected to draw down a total of RM1.5 billion in 2024 which will lead to a projected DE ratio of 0.7x. Cash and bank balances of RM1.2 billion provide some liquidity buffer.

The stable outlook reflects MARC Ratings’ expectations that FGV will broadly maintain its credit profile within the current levels over the next 12 months.

Any upward movement in the rating and/or outlook is unlikely in the near term. The standalone rating and/or outlook could come under pressure if FGV’s financial performance weakens substantially from expectations and/or if borrowings increase higher than projected. A downward rating action could result from a significant change in the support extended by FELDA.