Monday, Oct 22, 2001
Malaysian Rating Corporation Berhad (MARC) has assigned a long term corporate debt rating of A (single A flat) to Tian Siang Holdings Sdn Bhd’s (Tian Siang) RM93 million nominal value coupon bearing secured serial bonds. The rating reflects the strength of the cashflow protection measures, moderate debt leverage level and operating efficiency, niche market positioning and moderate operating risk. The rating is however moderated by the inherent risk and uncertainty of the palm oil industry.
The palm oil industry is characterised by volatility in commodity price of crude palm oil (CPO) with limited ability to influence prices. This is moderated to a certain extent as planters are increasingly venturing into milling operations hence integrating their business. For now, CPO futures contracts on the Malaysia Derivatives Exchange Bhd (MDEX) have shown some improvement with the CPO price for January 2002 futures contract at RM1,266 per metric tonne (MT). Having been in the doldrums for at least about 12 months, the prices are currently showing an encouraging trend and is expected to remain so at least until early 2002.
The efficiencies of Tian Siang’s plantation activities is demonstrated by its yields in relation to its planting profile. The average yield was 20.14 MT/ha as at end-December 2000 against the industry average of 19.26 MT/ha. The high average yield was not only due to the mature-to-planted acreage ratio of about 82% but also due to their location in East Malaysia (Kinabatangan, Sabah) where the volcanic soil is more fertile. Based on its small hectarage of old mature palms, MARC does not foresee any massive replanting exercise in the near future.
As a private palm oil mill operator, Tian Siang’s competitive advantage would essentially lie on its accessibility and location. The good infrastructure and logistics, the wide open space to unload the fresh fruit bunches (FFB) and strategic location near the surrounding estates have been the main attraction for planters to send their FFB to its mills. Besides, its market niche is more towards milling operations rather than the plantation where margins are more sustainable.
Tian Siang’s oil extraction rate (OER) as at 31 December 2000 was about 19%; which is above the industry average of 18.86%. Over the years, the Group’s OER has been above industry average as it employs state-of-the-art processing technique (decanter), which provides better extraction rate hence efficiency.
The CPO produced by the respective mills is contracted to major refineries, which are located in the local vicinity. The supply is contracted through formal offtake agreements signed between the mills and these refineries (almost all major refineries are owned by the Kuok Group).
Prior to FY2000, Tian Siang’s operating margin was quite stable, at double-digits. This was mainly attributed to the favourable CPO prices then. The decline in the CPO prices especially during the second half of calendar year 2000 has taken its toll on Tian Siang with operating margin falling by almost two-thirds. Relative to its rated peers, its performance is considered to be above average. Going forward, MARC expects the volatility in the CPO prices to continue to dictate the Group’s profitability. Nevertheless this is mitigated by the consolidation of the various palm oil mills in the Group’s new corporate structure.
The Group’s historical gearing level has been low, ranging between 0.4x-1.3x for the past five years. After the bonds issue, its proforma debt leverage is expected to marginally increase to 0.59x. A debt leverage cap of 0.7x has been imposed under the issue structure.
MARC’s sensitivity analysis shows that Tian Siang’s projected cashflow is still expected to record a cash surplus (after the full redemption of the proposed bonds issue), even after the CPO price assumptions were heavily discounted. The robustness of its cashflow primarily rests with the strength of its milling operations.
The palm oil industry is characterised by volatility in commodity price of crude palm oil (CPO) with limited ability to influence prices. This is moderated to a certain extent as planters are increasingly venturing into milling operations hence integrating their business. For now, CPO futures contracts on the Malaysia Derivatives Exchange Bhd (MDEX) have shown some improvement with the CPO price for January 2002 futures contract at RM1,266 per metric tonne (MT). Having been in the doldrums for at least about 12 months, the prices are currently showing an encouraging trend and is expected to remain so at least until early 2002.
The efficiencies of Tian Siang’s plantation activities is demonstrated by its yields in relation to its planting profile. The average yield was 20.14 MT/ha as at end-December 2000 against the industry average of 19.26 MT/ha. The high average yield was not only due to the mature-to-planted acreage ratio of about 82% but also due to their location in East Malaysia (Kinabatangan, Sabah) where the volcanic soil is more fertile. Based on its small hectarage of old mature palms, MARC does not foresee any massive replanting exercise in the near future.
As a private palm oil mill operator, Tian Siang’s competitive advantage would essentially lie on its accessibility and location. The good infrastructure and logistics, the wide open space to unload the fresh fruit bunches (FFB) and strategic location near the surrounding estates have been the main attraction for planters to send their FFB to its mills. Besides, its market niche is more towards milling operations rather than the plantation where margins are more sustainable.
Tian Siang’s oil extraction rate (OER) as at 31 December 2000 was about 19%; which is above the industry average of 18.86%. Over the years, the Group’s OER has been above industry average as it employs state-of-the-art processing technique (decanter), which provides better extraction rate hence efficiency.
The CPO produced by the respective mills is contracted to major refineries, which are located in the local vicinity. The supply is contracted through formal offtake agreements signed between the mills and these refineries (almost all major refineries are owned by the Kuok Group).
Prior to FY2000, Tian Siang’s operating margin was quite stable, at double-digits. This was mainly attributed to the favourable CPO prices then. The decline in the CPO prices especially during the second half of calendar year 2000 has taken its toll on Tian Siang with operating margin falling by almost two-thirds. Relative to its rated peers, its performance is considered to be above average. Going forward, MARC expects the volatility in the CPO prices to continue to dictate the Group’s profitability. Nevertheless this is mitigated by the consolidation of the various palm oil mills in the Group’s new corporate structure.
The Group’s historical gearing level has been low, ranging between 0.4x-1.3x for the past five years. After the bonds issue, its proforma debt leverage is expected to marginally increase to 0.59x. A debt leverage cap of 0.7x has been imposed under the issue structure.
MARC’s sensitivity analysis shows that Tian Siang’s projected cashflow is still expected to record a cash surplus (after the full redemption of the proposed bonds issue), even after the CPO price assumptions were heavily discounted. The robustness of its cashflow primarily rests with the strength of its milling operations.