View Credit Analysis Report (60572)

MARC has affirmed TSH Sukuk Murabahah Sdn Bhd’s RM150 million Medium Term Notes (Sukuk Murabahah IMTN) programme rating of A+_IS and concurrently upgraded its RM50 million Sukuk Murabahah Commercial Papers (Sukuk Murabahah ICP) programme rating to MARC-1IS from MARC-2IS. The ratings outlook is stable. The total notes outstanding as at end-April 2020 are RM150.0 million under the Sukuk Murabahah IMTN programme and RM275.0 million under the Sukuk Ijarah IMTN programme.

MARC’s assessment reflects the credit profile of TSH Resources Bhd (TSH) which has provided an irrevocable and unconditional undertaking to meet the financial obligations of its subsidiary TSH Sukuk Murabahah, a special purpose funding vehicle for its parent. TSH’s other funding vehicle is TSH Sukuk Ijarah Sdn Bhd.

The short-term rating upgrade to MARC-1IS considers TSH’s efforts in improving the group’s liquidity position by lengthening its debt maturity profile and managing its working capital requirement, thereby mitigating near-term liquidity risk. The affirmed long-term rating reflects TSH’s large palm oil acreage under cultivation and favourable tree maturity profile that have been, and would be, supportive of cash flow generation. The rating also factors the group’s longstanding experience in oil palm cultivation that would mitigate the renewed challenges in the palm oil industry following the COVID-19 pandemic. The rating remains moderated by the volatility of crude palm oil (CPO) prices and cross-border risk given that its plantations are mainly based in Indonesia, although this risk is mitigated by the group’s lengthy track record of operations in that country.

TSH has total planted area of 42,109 ha, of which about 39.3% of the planted area is of prime age at end-2019. Its favourable tree maturity profile is further supported by the fact that about 48.2% of the planted area comprises immature and young matured trees. This implies that its fresh fruit bunch (FFB) production, which rose by 4.2% y-o-y to 893,738 MT in 2019, will be well supported by an increasing number of trees entering prime age over the medium term. Higher production notwithstanding, the group’s revenue fell by 7.4% y-o-y to RM838.9 million on the lower average CPO selling price of RM1,995/MT (2018: RM2,086/MT).

For 1Q2020, TSH recorded higher revenue and operating profit y-o-y of RM257.4 million and RM57.7 million, mainly on higher average CPO selling price of RM2,599/MT (2019: RM1,995/MT). Free cash flow (FCF) remained positive at RM68.9 million (2019: RM68.5 million). Although CPO prices remain volatile, the rating agency expects CPO prices to be higher in 2020 than in the previous year. MARC notes that as TSH has limited its capex spending to replanting activities, capex is expected to be manageable given the relatively young profile of its trees. As borrowing levels are also expected to remain flat at around RM1.45 billion (at end-March 2020) and given the projected lower capital spending, TSH’s financial metrics are expected to strengthen in 2020. The group has made efforts in rebalancing its funding profile by lengthening the maturity profile of a portion of its short-term borrowings to between five and six years. The rating agency understands that the overall impact from COVID-19 on TSH’s plantation activities has been modest with its estates operating as normal.

The stable outlook reflects MARC’s expectation that TSH’s credit metrics would commensurate with the rating band in line with the management’s disciplined approach to manage cash flow generation and its capital requirement. The long-term rating outlook could be upgraded if there is a meaningful improvement in its debt metrics, particularly its leverage ratio.

Major Rating Factors

Strengths
• Favourable maturity profile of oil palm trees to support production 

        growth; and
• Improved liquidity position.