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RAM Ratings reaffirms Chellam Plantations’ AAA(fg) sukuk rating

Published on 05 Jul 2019.

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RAM Ratings has reaffirmed the AAA(fg)/Stable rating of the RM150 million 10-year tranche (2016/2026) under Chellam Plantations (Sabah) Sdn Bhd’s (the Group) RM300 million Guaranteed Sukuk Murabahah Programme (2016/2033). The enhanced rating is premised on the irrevocable and unconditional guarantee extended by Danajamin Nasional Berhad (rated AAA/Stable/P1). 

Independent of the financial guarantee, Chellam Plantations’ stand-alone credit profile is constrained by its position as a relatively small planter, with a planted area of 13,649 ha. The Group’s 219,811 MT of FFB output in FY Dec 2018 (FY Dec 2017: 152,423 MT) is still low relative to its milling capacity of 871,200 MT per annum. The much larger milling capacity was a deliberate strategy to pursue incremental profits from processing external FFB despite the thin margins. As only 31% of the Group’s FFB feedstock was sourced internally last year, its dependence on third-party crop remains high. Nevertheless, the mill in Sabah has been operating at near full capacity due to the high barriers of entry imposed on new mills while third-party crop purchases for the Indonesian mills are expected to decline when estates there enter their prime and the remaining landbank fully planted.

Despite large external purchases, Chellam Plantations’ cost per MT of CPO decreased markedly to RM1,650 in fiscal 2018 (fiscal 2017: RM2,204), underpinned by the low average cost for its external FFB purchases. Notably, the Group’s oil extraction rate (OER), which stood at 22% in fiscal 2018, remains commendable and comparable to those of larger regional players.

Chellam Plantations’ overall FFB production expanded a robust 44% in fiscal 2018. This was primarily driven by its East Kalimantan estates (+78%). Consequently, the Group’s overall FFB and CPO yields improved to a respective 16.73 MT/mature ha and 3.64 MT/mature ha (FY Dec 2017: 12.69 and 2.79 MT/mature ha). Moving forward, Chellam Plantations is anticipated to sustain its strong FFB growth momentum, backed by its large proportion of young and prime palms, which constituted some 78% of its total planted area (overall weighted-average age: 11 years) in FY Dec 2018. The Group’s FFB output is projected to reach 300,000 MT per annum over the medium term (FY Dec 2018: 219,811 MT). 

While the Group’s debt level stayed elevated at RM340.79 mil in FY Dec 2018 (+0.2% y-o-y), its gearing ratio remained manageable, albeit marginally higher at 0.67 times (FY Dec 2017: 0.65 times). This was due to dividend payments and a smaller equity base amid the further depreciation of the Indonesian rupiah against the ringgit. At the same time, Chellam Plantations’ FFO debt cover improved markedly to 0.18 times (FY Dec 2017: 0.08 times), attributable to its healthier profitability, as a result of lower production cost amid higher output and cheaper external crop feedstock. Looking ahead, the Group’s gearing ratio is envisaged to hover around 0.65 times over the next two years, before tapering off given its plans to reduce its debts from fiscal 2020 onwards. The Group’s FFO debt cover is expected to be sustainable at around 0.15 times over the next two years, underpinned by strong output growth as more high-yielding young palms mature.  

The Group intends to replant its ageing Sabah estates by 450-500 ha per annum. The replanting exercise is envisioned to enhance the productivity of its Sabah estates in the long run, given that the Group will use better quality plant materials and improve its terrain for higher productivity and mechanisation. In the short term, however, the output of its Sabah estates will decline as the new plantings will require a gestation period. This should, however, be mitigated by the more robust production of its East Kalimantan estates.

Chellam Plantations is an investment-holding company with subsidiaries involved in the cultivation of oil palms and the milling of palm oil. The Group’s land bank spans 17,075 ha across Sabah and East Kalimantan; out of this, 13,649 ha have been planted. 

 

Analytical contact
Thong Mun Wai
(603) 3385 2522
munwai@ram.com.my

Media contact
Padthma Subbiah
(603) 3385 2577
padthma@ram.com.my

 

The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.

RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.

Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.

Published by RAM Rating Services Berhad
© Copyright 2019 by RAM Rating Services Berhad



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