MARC has affirmed its rating of AAA_IS(fg) on special-purpose vehicle TSH Sukuk Musyarakah Sdn Bhd’s (TSH Sukuk Musyarakah) RM100.0 million Guaranteed Islamic Medium-Term Notes (IMTN) Programme. The outlook is stable. TSH Sukuk Musyarakah is one of three special purpose funding vehicles set up by its parent, TSH Resources Berhad (TSH), to fund TSH’s crude palm oil (CPO) operations. The others are TSH Sukuk Ijarah Sdn Bhd and TSH Sukuk Murabahah Sdn Bhd. The total notes outstanding under TSH Sukuk Musyarakah’s programme is RM50.0 million as at January 8, 2018.

The affirmed rating is based on the unconditional and irrevocable financial guarantee insurance provided by Danajamin Nasional Berhad (Danajamin) on which MARC maintains an insurer financial strength rating of AAA/stable. On a standalone basis, TSH’s credit profile benefits from its established track record in oil palm cultivation, its improved cash flow generation and healthy tree maturity profile. Moderating its credit strengths, however, are TSH’s high leverage position and the susceptibility of its performance to CPO price volatility. Given that most of its plantations are in Indonesia, TSH is exposed to cross-border risk.

As a predominantly upstream plantation group, TSH has benefited from CPO’s improved price environment. For nine months ended September 30, 2017 (unaudited), TSH’s consolidated revenue and operating profit rose by 28.0% y-o-y to RM803.6 million and 78.4% y-o-y to RM151.8 million respectively. The improved performance was on the back of a bigger fresh fruit bunches (FFB) harvest, which increased by 33.2% y-o-y to 537,246 metric tonnes (MT), and higher average CPO price of RM2,727/MT (9M2016: RM2,356/MT). MARC considers TSH’s cost efficiency as a palm oil producer to be good, taking into account its average production cost of RM1,078/MT and RM1,655/MT for 9M2017 in Malaysia and Indonesia respectively in the context of tree age profiles and weather developments in both countries. Its production cost for Malaysian operations compares favourably to an average of RM1,500/MT for Malaysian producers. Its cost profile in Indonesia is expected to benefit from an improving tree maturity profile going forward. For 9M2017, TSH achieved an oil extraction rate of 20.0% which is slightly lower than 20.8% in 9M2016 largely due to the residual effects of El Nino.

MARC expects TSH’s cash flow generation to increase over the intermediate term, led by higher yields in the absence of any adverse weather events and the improving maturity profile of the group’s palm trees. TSH has a favourable tree maturity profile with an average age of nine years; about 52.1% is classified as mature while 47.9% of the group’s planted area will enter prime production age progressively over the next seven to eight years. MARC notes that TSH benefits from low land costs, given that a significant portion of its land bank was acquired much earlier. The group is exposed to cross-border regulatory and exchange rate risks as 91% of TSH’s total land bank (99,525 ha) and 85% of its total planted area (42,019 ha) is in Indonesia. This risk is partly mitigated by the group’s experience of over a decade in the country, as well as its hands-on and prudent approach to plantation business management.

For 9M2017, cash flow from operations (CFO) increased to RM216.5 million (9M2016: RM88.0 million), while free cash flow (FCF) turned positive to RM57.0 million. TSH’s gearing reduced marginally to 0.86 times as at end-9M2017, with total group borrowings at RM1.4 billion (end-FY2016: RM1.5 billion). Of this, about 34.1% are trade-related and self-liquidating working capital loans. MARC notes that the group is actively seeking to refinance some of its current debt to longer dated maturities which is expected to improve its debt maturity profile. TSH’s near-term refinancing needs are manageable, in MARC’s view. Additionally, the rating agency expects higher internal cash generation from operations and lower capital expenditures to sustain improvements in TSH’s debt service coverage and leverage metrics moving forward.

The stable outlook reflects MARC’s expectations that TSH’s credit metrics will improve and that the company’s management will maintain a prudent and conservative approach towards further investments. Downward ratings pressure could arise if a sharp decline in CPO price and/or sales volume lead to protracted weakness of TSH’s financial performance and credit profile.

Contacts:
Hari Vijay, +603-2717 2937/ harivijay@marc.com.my;
Yap Lai Ken, +603-2717 2947/ laiken@marc.com.my