Thursday, Dec 12, 2002
The affirmation of Tian Siang’s corporate debt rating at A reflects, among others, the improvement in the Group’s operating efficiency and strong recovery of the palm oil prices which should strengthen its cash flow, going forward. The rating is, however, moderated by higher debt obligations following the issuance of the corporate debt and the Group’s vulnerability towards cyclical developments in the palm oil industry.
The palm oil industry is largely characterized by the volatility in the crude palm oil (CPO) prices. In 2001, the annual average CPO price fell to RM894.50 per metric tonne (MT) from the previous year’s average price of RM996.50 per MT. In the first half of 2002, the CPO average price had strongly recovered to RM1,230.50 per tonne, as reported by the Malaysian Palm Oil Board.
Tian Siang is an investment holding company whose subsidiaries are principally involved in palm oil plantations and palm oil milling. The Group’s plantations are located within the state of Sabah, with total palm oil planted area of 5,395 hectares as at end 2001. Its average FFB yield of 22.74 MT per hectare was above the industry average, reflecting the increasing maturity profile of the planted areas. Trees in their prime comprise more than 60% of total matured plantations. Based on the Group’s small hectarage of old mature palms, MARC does not foresee the Group undertaking any massive replanting exercise in the near future.
The Group currently operates four mills, with a maximum capacity of 230 MT/hour. Two mills are located in Perak and one in Sabah and Pahang respectively. In fiscal 2001, its mills recorded an average oil extraction rate (OER) of about 18.9%, marginally lower than the industry average of 19.2%. The CPO produced by the respective mills are supplied to nearby refineries. Tian Siang’s strength as a private oil mill operator is drawn from its mills’ good accessibility and location. The logistical advantage, well laid infrastructure coupled with the availability of wide open space to unload the FFB have been the main attractions for the nearby and surrounding estates to send their FFB to the Group’s mills.
Under the issue structure, a Commodity Reserve Account (CRA) mechanism has been incorporated, whereby 50% of any surplus net operational cash flow in a year will be swept into this account. The CRA provides an added liquidity buffer to cover the market risks associated with palm oil products. For FY2001, Tian Siang recorded a net CFO of RM21.1 million as compared to RM19.4 million in its original projections. As a result, Tian Siang had deposited RM0.86 million into the CRA.
In 2001, although Tian Siang’s revenue was bolstered by improved CPO prices especially during the second half of the year, its operating margin was lower mainly due to higher operational costs. Going forward, MARC expects the Group’s earnings to further improve in tandem with rising CPO prices and generally better performance of the palm oil industry.
Following the issuance of the bonds, the Group’s debt leverage rose to 0.64 times from 0.41 times in fiscal 2001. This is still below the debt leverage cap of 0.7 times imposed under the issue structure. Under MARC’s sensitivity analysis of Tian Siang’s projected cash flow, the latter’s cash generation capacity was generally found to be strong and, going forward, will be mainly driven by the Group’s milling operations.
The palm oil industry is largely characterized by the volatility in the crude palm oil (CPO) prices. In 2001, the annual average CPO price fell to RM894.50 per metric tonne (MT) from the previous year’s average price of RM996.50 per MT. In the first half of 2002, the CPO average price had strongly recovered to RM1,230.50 per tonne, as reported by the Malaysian Palm Oil Board.
Tian Siang is an investment holding company whose subsidiaries are principally involved in palm oil plantations and palm oil milling. The Group’s plantations are located within the state of Sabah, with total palm oil planted area of 5,395 hectares as at end 2001. Its average FFB yield of 22.74 MT per hectare was above the industry average, reflecting the increasing maturity profile of the planted areas. Trees in their prime comprise more than 60% of total matured plantations. Based on the Group’s small hectarage of old mature palms, MARC does not foresee the Group undertaking any massive replanting exercise in the near future.
The Group currently operates four mills, with a maximum capacity of 230 MT/hour. Two mills are located in Perak and one in Sabah and Pahang respectively. In fiscal 2001, its mills recorded an average oil extraction rate (OER) of about 18.9%, marginally lower than the industry average of 19.2%. The CPO produced by the respective mills are supplied to nearby refineries. Tian Siang’s strength as a private oil mill operator is drawn from its mills’ good accessibility and location. The logistical advantage, well laid infrastructure coupled with the availability of wide open space to unload the FFB have been the main attractions for the nearby and surrounding estates to send their FFB to the Group’s mills.
Under the issue structure, a Commodity Reserve Account (CRA) mechanism has been incorporated, whereby 50% of any surplus net operational cash flow in a year will be swept into this account. The CRA provides an added liquidity buffer to cover the market risks associated with palm oil products. For FY2001, Tian Siang recorded a net CFO of RM21.1 million as compared to RM19.4 million in its original projections. As a result, Tian Siang had deposited RM0.86 million into the CRA.
In 2001, although Tian Siang’s revenue was bolstered by improved CPO prices especially during the second half of the year, its operating margin was lower mainly due to higher operational costs. Going forward, MARC expects the Group’s earnings to further improve in tandem with rising CPO prices and generally better performance of the palm oil industry.
Following the issuance of the bonds, the Group’s debt leverage rose to 0.64 times from 0.41 times in fiscal 2001. This is still below the debt leverage cap of 0.7 times imposed under the issue structure. Under MARC’s sensitivity analysis of Tian Siang’s projected cash flow, the latter’s cash generation capacity was generally found to be strong and, going forward, will be mainly driven by the Group’s milling operations.