RAM Ratings reaffirms AA2 rating of First Resources’ sukuk

Published on 09 October 2013

RAM Ratings has reaffirmed the AA2/stable rating of First Resources Limited’s (“First Resources” or “the Group”) RM2.0 billion Islamic Medium-Term Notes Programme (2012/2022) (“IMTN” or “Sukuk Musharakah”).

First Resources’ credit standing reflects its strong business profile, underpinned by a 20-year track record in the Indonesian oil palm plantation sector and a lean cost structure. The Group’s cost per metric tonne (“MT”) of crude palm oil (“CPO”) for FY Dec 2012 of USD238 compares favourably to other efficient Malaysian and Indonesian planters. “First Resources’ low cost structure provides a substantial buffer against CPO price shocks or industry downcycles,” observes Thong Mun Wai, RAM’s Head of Real Estate and Construction Ratings. “While CPO prices may continue to come under pressure in the coming months, price levels are expected to be way above First Resources’ cost of production,” adds Thong Mun Wai. Its strong plantation and mill management practices underpin its consistently healthy fresh fruit bunch (“FFB”) yields and oil extraction rates (“OER”). Going forward, the Group’s relatively young tree profile will ensure strong and sustainable FFB production.

First Resources exhibits a sturdy balance sheet and strong debt-servicing ability. Despite a significant increase in borrowings as at end-December 2012, its adjusted gearing and net gearing ratios stayed strong at 0.47 times and 0.12 times, respectively. Its adjusted funds from operations debt coverage ratio came in at 0.46 times, while its adjusted operating cashflow debt coverage (“OCFDC”) ratio stood at 0.41 times. Moving forward, the Group’s balance sheet is expected to stay strong, with its gearing level estimated to remain below 0.50 times over the next 3 years. First Resources’ debt-protection measures are also projected to remain robust, with an OCFDC of about 0.30 times over the next 3 years.

Offsetting the above strengths is First Resources’ exposure to the cyclical nature of the plantation sector – an inherent risk for all planters. The Group’s performance is highly susceptible to volatile CPO prices, which are subject to factors beyond the control of planters. With its entire core operations located in Indonesia, the Group is deemed to operate within a more challenging landscape than its Malaysian peers, given Indonesia’s still-evolving institutional and legal frameworks. Indonesian planters have to contend with underdeveloped infrastructure and are exposed to frequent changes in the tax regime and laws governing the industry. Furthermore, the lack of transparency and integrity of statistics on the Indonesian plantation sector pose a challenge to industry players in assessing supply-demand dynamics prior to making investment decisions.

First Resources is listed on the Main Board of the Singapore Exchange Securities Trading Limited and manages 158,737 hectares of planted land as at end-March 2013.

Media contact

Ben Inn

(603) 7628 1024

ben@ram.com.my