RAM Ratings reaffirms ratings of RH Capital's Islamic debt securities

Published on 22 June 2011
RAM Ratings has reaffirmed the ratings of RH Capital Sdn Bhd’s (RH Capital or the Issuer) RM135 million Sukuk Ijarah (Sukuk Ijarah) and Sukuk Ijarah Commercial Paper/Medium-Term Notes (CP/MTN) Programme (collectively, “the Islamic Securities”); all the long-term ratings have a stable outlook. The stable rating outlook represents our expectation that the lessees (or the operators of the transaction’s assets) will be able to meet their scheduled Ijarah payments and, in turn, the payment obligations under the Islamic Securities throughout their remaining tenures.

The reaffirmation of the respective AAA, AA2 and A2 ratings of the Class A, Class B and Class C Sukuk Ijarah is premised on the transaction’s structural features and the cashflow stemming from the plantations, which is expected to average at around RM10 million per annum – in line with our sustainable cashflow projections. Together with the oil mills, the resultant adjusted valuations, loan-to-value (LTV) ratios and debt service cover ratios (DSCRs) remain commensurate with the ratings. To date, the lessees have performed their Ijarah obligations on a timely basis; this includes the most recent RM15 million principal redemption of the Class C Sukuk Ijarah in December 2010.

Meanwhile, the AAA(s)/P1(s) ratings of the Sukuk Ijarah CP/MTN Programme reflect the enhancement provided by the Sukuk Put Option, granted by OCBC Bank (Malaysia) Berhad (OCBC Malaysia) to the Sukuk holders. RAM Ratings reaffirmed OCBC Malaysia’s AAA/P1 financial institution ratings, with a stable outlook, on 27 October 2010.

Due to the lagged weather effects from El Nino in early 2010 and La Nina towards the end of last year that had hampered harvesting activities, the 3 estates’ average yields of fresh fruit bunches (FFB) declined slightly to 11.4 metric tonnes per matured hectare (MT/ha) in 2010 (2009: 12.3 MT/ha); this pattern emulated the year-on-year (y-o-y) performance at state level. Concurrently, the 3 estates’ FFB yields remained below Sarawak’s average of 14.9 MT/ha. Despite that, the cashflow generated by the estates had strengthened y-o-y because of higher FFB selling prices.

While the management had made some efforts - such as hiring more experienced and qualified estate managers and improving infrastructure - we expect a period of gestation before any significant progress in FFB yields, particularly given the 3 estates’ relatively young trees. Notably, 30% of their palms fall into the “immature” bucket while the remainder are generally young palms that produce relatively lesser yields compared to those in the prime bucket. Furthermore, the plantations’ performance remains challenged by erratic weather patterns. That said, there are signs of recovery from tree stress after the bumper crop in 2008; the industry is expected to experience the next cycle of strong production within the next 2 years.

Overall, the palm-oil mills of RH Selangau and RH Lundu exhibited a stable oil-extraction rate (OER) of 20.2% in 2010 (2009: 20.7%). At the same time, the mills’ kernel-extraction rate (KER) slipped slightly to 3.9% (2009: 4.2%), mainly due to smaller kernels from the younger palms. Underpinned by firm prices for crude palm oil (CPO) and more robust CPO output (+12.5% y-o-y), the lessees’ overall net operating cashflow augmented from RM27.0 million to RM42.1 million y-o-y. Going forward, we envisage the lessees’ performance to continue to be affected by CPO price movements. Nonetheless, we also derive comfort from Tiong Toh Siong Sdn Bhd’s – the parent company of RH Capital and the lessees – undertaking to meet the debt obligations under the Islamic Securities, if and when required.

Media contact
Tan Han Nee
603 – 7628 1023
hannee@ram.com.my