MARC has affirmed its rating of A+IS and MARC-1IS on TSH Sukuk Murabahah Sdn Bhd’s RM150 million Medium-Term Notes (IMTN) Programme and RM50 million Commercial Papers (ICP) Programme. Concurrently, the rating agency has affirmed its rating of A+IS on TSH Sukuk Ijarah Sdn Bhd’s RM300 million IMTN programme. The long-term ratings outlook has been revised to positive.
Both TSH Sukuk Murabahah and TSH Sukuk Ijarah are special purpose funding vehicles of TSH Resources Berhad (TSH) which has given an irrevocable and unconditional undertaking to meet the purchase obligations of these subsidiaries. The rating consideration is therefore based on the strength of TSH.
The outlook revision to positive is premised on the TSH group’s improved financial performance on the back of the resurgent crude palm oil (CPO) price environment since 4Q2020 that has strengthened its credit metrics. In 1H2021, TSH recorded a higher average CPO price of RM3,242/MT (2020: RM2,453/MT) that contributed to a 17.8% y-o-y increase in revenue to RM551.5 million. During this period, cash flow from operations (CFO) grew sharply by 31.2% y-o-y to RM159.2 million. Accordingly, CFO interest and debt coverages improved to 7.6x and 0.2x (2019: 3.5x; 0.1x).
We note that TSH group borrowings stood at RM1.2 billion as at end-June 2021, translating to a gross debt-to-equity (DE) ratio of 0.74x (2019: 0.91x). We also understand that proceeds of RM248 million from TSH’s impending sale of a combined 3,007 ha plantation with a palm oil mill in Kinabatangan, Sabah will be used to pare down borrowings. This would result in the group’s gross DE ratio to further improve to about 0.6x. The sale is expected to be completed by 1Q2022.
TSH’s lengthy track record in oil palm cultivation and favourable tree maturity profile that have yielded strong production metrics remain key rating drivers. We also view that the recent strong financial performance has provided headroom to undertake additional planting. The group has unplanted area of about 57,000 ha and planted area of 42,470 ha of which 45% comprises prime age trees. With about 43% comprising immature and young matured trees, fresh fruit bunch (FFB) production is expected to benefit over the medium term. For 1H2021, FFB production grew by 13.2% y-o-y to 483,338 MT. The ratings remain moderated by cross-border risk from its operations in Kalimantan, Indonesia where the majority of its plantations are located.
The long-term ratings could be upgraded if TSH sustains its production metrics and maintains the improvement in its credit metrics including gross leverage position of about 0.7x. Total notes outstanding are RM200.0 million under the Sukuk Murabahah IMTN and ICP programmes and RM25.0 million under the Sukuk Ijarah IMTN programme as at end-September 2021.
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