RAM Ratings has reaffirmed the AA2/Stable rating of First Resources Limited’s (First Resources or the Group) RM2.0 billion Sukuk Musharakah Programme (2012/2022).

Published on 30 October 2015

Among the 10 largest (by planted hectarage) listed oil palm planters globally, First Resources’ favourable tree maturity profile (the weighted average age of its palms standing at about 9 years) remains an important growth driver for the Group. In 1H FY Dec 2015, the recovery of the Group’s Riau estates from biological tree stress and the successful rehabilitation of acquired plantations had fuelled an 18% y-o-y growth in fresh fruit bunch (FFB) production, with crude palm oil (CPO) production increasing 14% y-o-y. These factors, coupled with a lean cost structure, had translated into a commendable operating profit before depreciation, interest and tax (OPBDIT) margin of 50.3% (FY Dec 2014: 48.7%), providing the Group with a substantial buffer to weather the industry downcycle. Notwithstanding the competitive operating environment in the refining sector, First Resources’ integrated business model reduces its susceptibility to levies and policy changes that impact specific segments of the palm oil production value chain.
As with industry peers, weaker CPO prices in 1H FY Dec 2015 had weighed on First Resources’ cashflow debt coverage. The Group’s annualised funds from operations debt cover (FFODC) and operating cashflow debt cover (OCFDC) had declined to 0.25 times and 0.19 times respectively, as cashflow generation was constrained by weak prices. That said, production growth potential stemming from the Group’s large maturing areas as well as the higher yield potential of maturing trees are expected to sustain its FFODC at above 0.3 times over time.
Elsewhere, notwithstanding a higher gearing ratio that follows with amendments to FRS41 Agriculture, and the Group’s adoption of the cost model under FRS16 Property Plant and Equipment, effective 1 January 2016, First Resources’ leverage is envisaged to remain manageable. Its Debt/Annualised OPBDIT stood at 2.45 times as at end-June 2015, and is expected to be preserved below 3 times on a sustained basis. Reduced capex – amid the tapering of new planting plans – that would be sufficiently met by the Group’s internally generated cashflow, is expected to alleviate debt-funding pressure. Additional comfort is also derived from First Resources’ healthy liquidity profile and large cash pile of USD291 million (including USD92 million of restricted cash) amounting to about 55% of total outstanding debt as at end-June 2015.
The rating remains moderated by the Group’s susceptibility to volatile CPO prices and the cyclical nature of the plantation sector. An ample supply of substitute oils amid lacklustre demand growth and a weak crude-oil price environment are expected to keep CPO prices in check. That said, the effect of unfavourable weather conditions on palm oil production and a pick-up in biofuel demand as regional biodiesel mandates gain traction could alleviate inventory woes and ease downward pressure on CPO prices. Coupled with a weak ringgit, CPO is envisaged to trade between RM2,200/MT and RM2,400/MT in 2016.
In addition to the industry’s vulnerability to tax changes in producing and consuming nations, First Resources is deemed to operate within a more challenging landscape in Indonesia, as the republic’s still-evolving institutional and legal frameworks heighten operational uncertainties and complexities. Nevertheless, some comfort is drawn from the Group’s more than 20 years of operations and experience in managing some of these risks.

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Juliana Koay
(603) 7628 1169
juliana@ram.com.my