FW: RAM Ratings reaffirms Genting Plantations' ratings

 

Published on 07 Dec 2017.

RAM Ratings has reaffirmed the AA2/Stable/P1 corporate credit ratings of Genting Plantations Berhad (Genting Plantations or the Group) and the AA2(s)/Stable rating of the RM1.5 billion Sukuk Murabahah Programme (2015/2030) issued by the Group’s wholly owned funding conduit, Benih Restu Berhad. The reaffirmation of the ratings is premised on our opinion that Genting Plantations’ credit metrics will remain supportive of its ratings, with higher-than-anticipated debt levels sufficiently mitigated by robust cash reserves. 

Operationally, a recovery in yields amid the easing effects of El Nino had resulted in a 34% y-o-y jump in Genting Plantations’ fresh fruit bunch output in 1H FY Dec 2017. This coupled with stronger CPO prices (+17% y-o-y) had caused the Group’s operating profit before depreciation, interest and tax (OPBDIT) to surge 96% y-o-y in 1H fiscal 2017 and is expected to maintain an uptrend for the full year. Overall CPO yields of 3.8-4.5 MT per mature hectare in the last 3 years have compared well to that of large regional peers with similar tree profiles, backed by the Group’s strong plantation management. Its crop yields are expected to improve as its young Indonesian estates ease into prime-yielding phases in the coming years.

The ratings also take into account Genting Plantations’ strong balance sheet. However, its debts had increased to a hefty RM2.46 billion as at end-June 2017, and are envisaged to rise to about RM3.20 billion in the next 1-2 years due to the borrowings of a recently acquired company owning plantation land in Indonesia, as well as additional debts to be incurred for its Indonesian operations and downstream manufacturing business. This will push the Group’s net gearing to above 0.20 times – although slightly higher than our rating trigger in the interim, the ratio is expected to fall below 0.2 times in fiscal 2019 on the back of profit accretion. Although funds from operations debt coverage might dip below 0.20 times this year, the ratio is anticipated to recover to 0.20 times next year while net debt coverage levels continue to support the ratings. 

As with all planters, the Group is highly exposed to the volatility of CPO prices and rising pressure stemming from environmental issues. The ratings are also moderated by the Group’s cost structure which remained elevated compared to large regional peers’, partly owing to its younger tree profile. In addition, Genting Plantations is considerably exposed to the more challenging operating environment in Indonesia, where 58% of its planted area and the bulk of its unplanted land are located. Genting Plantations also faces forex risk as US dollar-denominated borrowings continued to make up a sizeable 52% of the Group’s debt as at end-June 2017, and given that its earnings are mostly denominated in ringgit. The management has not hedged this exposure due to the long-dated nature of the borrowings. Nevertheless, as CPO prices are tied to the US dollar, the positive effects of a weaker ringgit on the Group’s top line will partially offset this risk.

The Sukuk Programme under Benih Restu is backed by an irrevocable and unconditional corporate guarantee from Genting Plantations. As such, the enhanced issue rating reflects the credit profile of the Group.

 

Analytical contact
Karin Koh, CFA
(603) 7628 1174 
karin@ram.com.my

Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my