MARC AFFIRMS ITS AAAIS(FG) RATING ON TSH SUKUK MUSYARAKAH’S IMTN

Mar 28, 2013 -

MARC has affirmed its rating on TSH Sukuk Musyarakah Sdn Bhd’s (TSH Musyarakah) RM100.0 million Islamic Medium Term Notes (IMTN) Programme at AAAIS(fg) with a stable outlook. The rating action affects outstanding notes of RM50.0 million issued under the rated programme.

TSH Musyarakah is a special purpose funding vehicle created to facilitate the issuance of the notes under the rated programme on behalf of plantation-based company, TSH Resources Berhad (TSH, or the group). The group is involved in oil palm cultivation and bio-integration, wood product manufacturing and trading, and cocoa manufacturing and trading, with more than 92% of its revenue and earnings derived from its palm oil-based operations during the financial year ended 2012.

The affirmed rating and outlook of TSH Musyarakah reflect an unconditional and irrevocable financial guarantee insurance policy provided by Danajamin Nasional Berhad (Danajamin) in relation to the rated programme. The supported rating is premised on the strong credit profile of Danajamin, which MARC has rated AAA/stable on the basis of its status as a government-sponsored financial guarantee insurer (FGI) and perceived high support from the government in view of its public policy objective of facilitating greater corporate access to the domestic sukuk and bond markets.

TSH’s FFB production decreased by 5.1% to 283,908 metric tonnes (MT) during 9M2012 compared to the corresponding period of the previous year. The lower FFB output was due to tree stress following a bumper harvest in 2011. Overall, TSH’s FFB yield decreased to 15.3 MT per ha in 9M2012 from 15.8 MT per ha in 9M2011. Declining CPO prices exacerbated the impact of falling FFB output on TSH’s revenue and earnings during the period due to slower demand for CPO from its main export markets including China, Europe, India and the US. Average CPO price dropped 5.2% to RM2,696 per MT during 9M2012 (9M2011: RM2,843 per MT), weighed down by lower export demand. 

TSH’s FFB output has started to pick up from 4Q2012 on the back of recovery from tree stress and new oil palm acreage coming into maturity. The group’s total mature hectarage increased by 13.4% to 18,176 ha in 9M2012 (2011: 16,033 ha) attributable to the group’s planting activities in the previous years. The group’s planted area increased by 10.2% to 32,530 ha as of September 2012 compared to 29,522 ha as at end-December 2011. As at September 30, 2012, 33% of the group’s total land bank is already planted, of which 56% represents mature hectarage.

The segment losses of TSH’s wood products and cocoa manufacturing divisions were also a drag on its performance. Both segments registered lower production during 9M2012 because of weak export demand.

The group posted a significantly lower pre-tax profit of RM99.5 million (2011: RM161.9 million) on a 13.3% year-on-year decline on revenue to RM983.7 million (2011: RM1,134.2 million). A more pronounced decline was observed in the group’s cash flow from operations (CFO) which dropped to RM49.1 million (2011: 179.7 million). Consequently, the group’s consolidated cash flow debt and interest coverage metrics have fallen below MARC’s expectations for the current ratings. MARC also notes that TSH’s continued high plantation development capex has continued to weigh on the group’s liquidity and leverage. The group registered a larger negative free cash flow of RM205.4 million in 2012 while its debt-to-equity ratio deteriorated to 0.99x as at 2012 (2011: 0.78x).

Sukukholders of TSH Musyarakah are nonetheless, insulated from any downside risks in TSH’s consolidated credit profile by virtue of the guarantee provided by Danajamin. Any changes in the supported rating or rating outlook will be primarily driven by changes in Danajamin’s credit rating/outlook.

Contact:

Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.