MARC Ratings has affirmed its rating of AA-_IS on special purpose funding vehicle TSH Sukuk Murabahah Sdn Bhd’s RM150 million Islamic Medium-Term Notes (IMTN) Programme with a stable outlook. The rating assessment on TSH Sukuk Murabahah is based on the credit profile of parent TSH Resources Berhad (TSH) which has provided an irrevocable and unconditional undertaking to meet the obligations of its subsidiary under the sukuk transaction structure.

TSH’s favourable maturity profile of oil palm trees, strong earnings generation, and improved balance sheet structure are key rating drivers. These strengths are counterbalanced by the group’s exposure to the inherent volatility of crude palm oil (CPO) prices and cross-border risk as over 90% of its plantations are located in Indonesia.

TSH is a mid-sized plantation group with total planted area of 39,068 ha, comprising 74% of prime age trees and 17% of young mature trees as at end-2023. MARC Ratings views TSH’s favourable maturity distribution would be further strengthened as the young mature trees progressively enter prime age over the next five to six years, translating into higher fresh fruit bunches (FFB) yield over the medium term. Its FFB yield of 24.1 MT/ha remains strong in comparison with many of its peers, mainly reflecting TSH’s moderate scale of operations that enables stronger efficiency in terms of deploying resources and implementing plantation management initiatives. Nevertheless, FFB production is susceptible to weather conditions; TSH’s production declined slightly by 2.0% y-o-y to 905,437 MT in 2023, largely due to the dry spell in Indonesia and disposal of estates in Sabah.

Group revenue declined by 18.3% y-o-y to RM1.1 billion in 2023 due to lower average selling price of CPO of RM3,437/MT. Operating profit was strong, improving by 26.3% y-o-y to RM182.2 million even after excluding a one-off gain on asset disposal during the year. TSH’s disposal plan that commenced in 2022 resulted in the sale of 3,007.3 ha of land and a palm oil mill in Sabah as well as 8,392 ha of land in Kalimantan, generating total proceeds of RM685.2 million. However, the group’s remaining disposal of 5,398 ha of land in Kalimantan has not materialised. The rating agency understands that about 62% of this land contains oil palms in prime age of an average 12 years that would benefit the group’s output production going forward.

For 1Q2024, operating profit declined y-o-y to RM37.5 million due to lower CPO price. Total borrowings declined to RM273.5 million as the group continued to pare down borrowings including a repayment of RM90 million under the IMTN programme in 2023. This led to an improvement in gross and net debt-to-equity ratios to 0.12x and 0.01x as at end-1Q2024. Cash flow from operations was healthy at RM47.4 million. Liquidity remained strong with cash and bank balances of RM258.7 million. There are no issuances outstanding under the rated programme as at end-June 2024.

In addition to CPO price volatility that can impact cash flows, TSH remains exposed to cross-border risks given its sizeable plantation areas are in Indonesia. Therefore, any regulatory changes pertaining to the palm oil industry and land issues in that country would pose challenges to the group’s operations.