MARC AFFIRMS ITS AAAIS, AAIS, AND AIS RATINGS ON DURA PALMS SDN BHD’S SUKUK IJARAH SERIES

Jan 10, 2013 -

MARC has affirmed the ratings of Dura Palms Sdn Bhd’s (Dura Palms) RM100 million Series A, RM90 million Series B and RM10 million Series C Sukuk Ijarah at AAAIS, AAIS and AIS respectively. The ratings carry a stable outlook. The rating action affects the outstanding amounts under the respective series of RM50 million, RM48 million and RM10 million.

Wholly-owned by Teck Guan Holdings Sdn Bhd (TGH), Dura Palms is a special purpose vehicle incorporated to facilitate the issuance of the Sukuk Ijarah backed by the sale and leaseback of 6,861 hectares (ha) of oil palm estates located in Sabah under three of TGH’s subsidiaries, Andum Sdn Bhd (ASB), Happy Valley Plantation Sdn Bhd (HVP) and Teck Guan Plantations Sdn Bhd (TGP), collectively known as sellers/lessees. The average maturity profile of the planted hectarage of securitised estates ranges between 16 and 20 years.

The affirmed ratings of Series A and Series B reflect the satisfactory loan-to-value (LTV) ratios of the securitised estates to the outstanding borrowings commensurate with the respective rating and structural enhancements under the Sukuk Ijarah. The ratings also consider the credit protection inherent in the structure of the Sukuk Ijarah with an expected and legal maturity in June 2013 and December 2014 respectively and an irrevocable undertaking by TGH to provide liquidity support to the sellers/lessees and Dura Palms with respect to the Sukuk Ijarah. The LTV ratio of the Series A and Series B sukuk has improved to 19.4% and 38.0% respectively from 24.8% and 48.1% due to further sukuk redemption since MARC’s last rating review. MARC’s valuation discounts the rating agency’s assumed stabilised net operating income (NOI) of RM28.3 million at a capitalisation rate of 11%. Actual NOI of the securitised estates came in at RM57.9 million for the financial year ending January 31, 2012 (FY2012) (FY2011: RM35.1 million). Contributing to the higher-than-assumed stabilised NOI was the strong average selling price of fresh fruit bunches (FFB) during the year of RM611 per metric tonne (MT) (FY2011: RM550/MT) against MARC’s assumed RM290/MT at financial close.

The performance of the securitised estates in FY2012 was commendable with a 10.7% increase in production of FFB during the year due to better weather conditions. The yields of the securitised estates under ASB, HVP and TGH in FY2012 were 25.6MT/ha, 22.3MT/ha and 27.1MT/ha respectively (FY2011: 21.9MT/ha, 21.8MT/ha, 23.5MT/ha) compared to Sabah’s average of 22.6MT/ha (FY2011: 19.6MT/ha). However, in the nine-month period ended October 31, 2012 (9MFY2013), the securitised estates recorded a significant drop in yields to 12.8MT/ha, 11.3MT/ha and 17.8MT/ha respectively attributed to biological stress on the oil palm trees as a result of a bumper harvest in FY2012 and poorer weather conditions as reflected in Sabah’s weaker average yield of 14.3MT/ha during this period.

Meanwhile, the rating of the Series C sukuk represents a credit-linked tranche and effectively reflects MARC’s affirmed corporate credit rating of A on TGH. TGH’s rating reflects the group’s moderate plantation land banks and healthy maturity profile. Moderating the rating would be the group’s weak oleochemical operations in China and exposure to volatile commodity prices.

TGH reported revenue of RM2.05 billion in FY2012 (FY2011: RM1.82 billion) as a result of higher crude palm oil (CPO) prices during the year although this was moderated by lower revenue from its trading business which mainly deals with building materials, telecommunications, hardware, agriculture and consumer products. The better palm oil market resulted in TGH reporting strong pre-tax profit and operating cash flow of RM135.3 million and RM211.3 million respectively (FY2011: RM95.3 million; negative RM89.9 million). However, MARC expects TGH’s performance to decline in the current financial year with the weakening of CPO prices since July 2012.

The stable outlook incorporates MARC’s expectations that the sellers/lessees, and indirectly TGH, would be able to meet the expected maturity of the sukuk through a combination of internally generated funds and additional borrowings despite the weaker trade and price outlook for global edible oils.  Nevertheless, MARC believes that refinancing risk at the expected maturity of the sukuk is largely mitigated by the value and saleability of the securitised estates.

Contacts:

Koh Shu Yunn, +603-2082 2243/ shuyunn@marc.com.my;

Jason Kok Ching Wui, +603-2082 2258/ jason@marc.com.my;

David Lee, +603-2082 2255/ david@marc.com.my.