Thursday, Nov 29, 2001
Malaysian Rating Corporation Berhad (MARC) has assigned a long term rating of A ID (A flat Islamic Debt) in respect of TH Group Berhad’s (THG) proposed RM150 million Al-Bai Bithaman Ajil Islamic Debt Securities (BaIDS). The rating mainly reflects its diversified business portfolio, strong operating record, relatively strong balance sheet and the fairly stringent requirements under the issue structure. These factors are moderated by the cyclical nature of the plantation and timber businesses as well as the group’s exposure on its investments in various venture capital activities.
THG is principally an investment holding company with subsidiaries engaged in plantation, contracting services and more recently in information technology and venture capital. Plantation and contracting services (timber extraction, construction and plantation development) comprise the two core businesses of the group, with contracting services overtaking the plantation division in terms of contribution to group revenue over the past two years.
THG’s total palm oil planted area stood at 11,386 hectares at year end 2000, located within the state of Sabah. The group’s FFB yield of 23.95 MT per hectare as at the same date was above the industry average, reflecting the increasing maturity profile of the planted areas. Trees in their prime comprise more than half of total plantations while over-aged palms are less than 1%. The oil extraction rate of the group’s only mill was also above average at 21.07%. In the near term, CPO demand and prices are expected to recover following higher imports from India, which is the world’s biggest CPO importer and Malaysia’s leading CPO export destination.
The group has a long history of timber extraction activities in Sabah, under contracts with Yayasan Sabah, the state’s largest timber concession holder. The state’s downstream timber processing industry is presently suffering from a severe shortage of logs due to forest conservation efforts. Earlier this year, the group secured exclusive rights to extract timber from an area of approximately 145,000 hectares in East Kalimantan. This contract is expected to sustain the group’s revenue base through to the long term. Besides the timber extraction fees, THG will also earn marketing fees from its sale of the logs.
Apart from timber extraction, the other major contracting service provided by the group is construction. The group was recently awarded two new contracts to build low cost residential houses in Sandakan and also residential buildings for the Pitas Hospital in Sabah, bringing its total secured order book to around RM116 million as at October 2001.
Through its 70% equity interest in Technology Asia Ventures Sdn. Bhd. (TAV) (formerly known as Internet Technology Asia Ventures Sdn. Bhd.), THG is involved in venture capital operations, primarily in ICT and life sciences (biotechnology). TAV’s total investments to date amounted to USD18.7 million (RM71.03 million); within the cap of RM98.8 million (slightly below 30% of shareholders’ funds) set by the group for such investments. Most of the investee companies’ products are already in their development phase and proceeding towards commercialization. The group is also involved in the information technology business conducted by another subsidiary, THG Itech Sdn Bhd.
Under the issue structure, liquidity risk has been mitigated through the maintenance of a secondary note liquidity buffer in a Reserve Account. A sweep mechanism has also been incorporated in the issue structure, whereby 50% of any surplus net operational cash flow in a year will be swept to a Commodities Reserve Account to serve as liquidity buffer for the redemption of primary notes.
The group’s debt leverage has historically been low, and even with the issuance of the BaIDS, its pro-forma debt-to-equity ratio will rise to only 0.5 times. Cash generation capacity was generally found to be strong and, going forward, will be driven in part by increasing contribution from the group’s contracting division, particularly from its timber extraction contract in Kalimantan.
THG is principally an investment holding company with subsidiaries engaged in plantation, contracting services and more recently in information technology and venture capital. Plantation and contracting services (timber extraction, construction and plantation development) comprise the two core businesses of the group, with contracting services overtaking the plantation division in terms of contribution to group revenue over the past two years.
THG’s total palm oil planted area stood at 11,386 hectares at year end 2000, located within the state of Sabah. The group’s FFB yield of 23.95 MT per hectare as at the same date was above the industry average, reflecting the increasing maturity profile of the planted areas. Trees in their prime comprise more than half of total plantations while over-aged palms are less than 1%. The oil extraction rate of the group’s only mill was also above average at 21.07%. In the near term, CPO demand and prices are expected to recover following higher imports from India, which is the world’s biggest CPO importer and Malaysia’s leading CPO export destination.
The group has a long history of timber extraction activities in Sabah, under contracts with Yayasan Sabah, the state’s largest timber concession holder. The state’s downstream timber processing industry is presently suffering from a severe shortage of logs due to forest conservation efforts. Earlier this year, the group secured exclusive rights to extract timber from an area of approximately 145,000 hectares in East Kalimantan. This contract is expected to sustain the group’s revenue base through to the long term. Besides the timber extraction fees, THG will also earn marketing fees from its sale of the logs.
Apart from timber extraction, the other major contracting service provided by the group is construction. The group was recently awarded two new contracts to build low cost residential houses in Sandakan and also residential buildings for the Pitas Hospital in Sabah, bringing its total secured order book to around RM116 million as at October 2001.
Through its 70% equity interest in Technology Asia Ventures Sdn. Bhd. (TAV) (formerly known as Internet Technology Asia Ventures Sdn. Bhd.), THG is involved in venture capital operations, primarily in ICT and life sciences (biotechnology). TAV’s total investments to date amounted to USD18.7 million (RM71.03 million); within the cap of RM98.8 million (slightly below 30% of shareholders’ funds) set by the group for such investments. Most of the investee companies’ products are already in their development phase and proceeding towards commercialization. The group is also involved in the information technology business conducted by another subsidiary, THG Itech Sdn Bhd.
Under the issue structure, liquidity risk has been mitigated through the maintenance of a secondary note liquidity buffer in a Reserve Account. A sweep mechanism has also been incorporated in the issue structure, whereby 50% of any surplus net operational cash flow in a year will be swept to a Commodities Reserve Account to serve as liquidity buffer for the redemption of primary notes.
The group’s debt leverage has historically been low, and even with the issuance of the BaIDS, its pro-forma debt-to-equity ratio will rise to only 0.5 times. Cash generation capacity was generally found to be strong and, going forward, will be driven in part by increasing contribution from the group’s contracting division, particularly from its timber extraction contract in Kalimantan.