RAM Ratings has reaffirmed the ratings of Genting Plantations Berhad (Genting Plantations or the Group) and Benih Restu Berhad’s RM1.5 billion Sukuk Murabahah Programme (2015/2030) at a respective AA2/Stable/P1 and an enhanced AA2(s)/Stable.

Published on 26 October 2015

The Group’s ratings are premised on its sturdy balance sheet and still-strong credit metrics despite an increase in debt level and softer prices for crude palm oil (CPO). While the Group’s debt had more than doubled y-o-y to RM2.17 billion as at end-June 2015, we still view its financial management as conservative, characterised by a solid capital base and typically-sizeable cash reserves. As Genting Plantations is expected to maintain its current debt level going forward, its gearing ratio will hover at 0.50 times while its gross cashflow debt-coverage ratios will not exceed 0.20 times. Although these ratios are weaker than previously anticipated, we expect the Group’s net gearing position to stay strong in view of its practice of retaining a large cash pile. Additionally, operational cashflows will largely be able to satisfy its capex needs in the next few years. The Group’s liquidity profile and financial flexibility are also solid.
Operationally, Genting Plantations has a longstanding track record within the plantation sector. The Group’s CPO yields of between 4.5 and 4.9 metric tonnes per mature hectare in the last few years (with its more mature Malaysian estates recording above 5 metric tonnes per mature hectare) are fairly comparable to that of well-run peers with young tree profiles – a testament of its good agronomic practices. The Group’s production of fresh fruit bunches (FFB) grew 9% y-o-y in FY Dec 2014, on the back of an increased crop output from its young but maturing Indonesian estates. Although the Group’s FFB output shrank in 1Q FY Dec 2015 in tandem with broad industry trends, we observed a recovery in 2Q, bringing 1H production growth to 1%. We expect Genting Plantations’ full-year crop output to come in stronger, supported by maturing palms in Indonesia. The more robust production should help improve its cost efficiency, which at present is weighed down by its younger tree profile.
The Group’s ratings are constrained by its vulnerability to CPO price volatility. CPO prices had weakened 15% y-o-y in 1H 2015 due to an ample supply of vegetable oils, softer demand and higher inventory levels. Prices had since dipped to as low as RM1,800/MT in August 2015 amid further concerns over the slowdown in China and global growth, but recently rallied to RM2,200-RM2,300/MT on account of the strengthening El Nino and its impact on production. With the weather phenomenon as well as the weak ringgit providing some price support, the price of the commodity is expected to average between RM2,200 and RM2,400 per MT in 2016.
With more than half of its planted area and the bulk of its unplanted land reserves in Indonesia, Genting Plantations is exposed to a more challenging operating environment which includes the republic’s still-evolving regulatory framework, protracted negotiations with land owners, land disputes and frequent changes in tax laws. To this end, the palm-oil levy on exporters of palm products, in place since mid-July 2015, is mildly negative for upstream planters in Indonesia.
With a USD-denominated loan making up 54% of its total debts, Genting Plantations is also exposed to forex risk. As the loan is not hedged due to its long-dated tenure, the severe depreciation of the ringgit and the Indonesian rupiah will, in the meantime, increase the Group’s borrowing costs. On balance, with CPO prices being tied to the USD, the positive effects from the weaker ringgit on the Group’s top line will partially offset this risk.
The Sukuk Programme under Benih Restu – a wholly-owned subsidiary and funding vehicle of Genting Plantations – is backed by an irrevocable and unconditional corporate guarantee from the latter. The enhanced issue rating, hence, reflects the credit profile of the Group.

Media contact
Karin Koh
(603) 7628 1174
karin@ram.com.my