Published on 30 Aug 2019.
RAM Ratings has reaffirmed the AA2/Stable rating of First Resources Limited’s (FRL or the Group) RM2.0 billion Sukuk Musharakah Programme (2012/2022). The reaffirmation reflects our view that FRL will stay resilient through the current industry downcycle on the back of the strong buffers afforded by its lean cost structure and sturdy balance sheet.
The Group’s revenue and operating profit before depreciation, interest and tax (OPBDIT) slipped 2% and 12% respectively last year as lower CPO prices (-10% y-o-y) negated its more robust production and sales volumes. FRL’s production of fresh fruit bunches (FFBs) grew 13% y-o-y to 3.4 mil MT last year, on the back of continued recovery in yields from El Nino weather conditions in 2015 as well as increased contributions from newly matured estates. Its FFB production, however, contracted 8% y-o-y in 1H FY Dec 2019 due to high-base effects and softening yields after two years of strong output growth. This, along with persistently depressed CPO prices, caused the Group’s OPBDIT to tumble 39% y-o-y in 1H FY Dec 2019.
On a more positive note, FRL’s debt level declined 23% y-o-y last year to USD381 mil amid debt repayment and because cashflow generation sufficiently covered its capex requirements. This enabled the Group to register a better funds from operations (FFO) debt cover of 0.51 times (fiscal 2017: 0.47 times) and improved gearing of 0.39 times compared to 0.49 times a year earlier. While FRL’s annualised FFO debt cover slid markedly to 0.22 times in 1H FY Dec 2019 in view of weaker profitability (1H FY Dec 2018: 0.49 times annualised), we expect FFO debt coverage to recover to above 0.3 times in the next one to two years on the back of the seasonal upswing in output in 2H, production growth in 2020, better commodity prices and manageable debt levels. Gearing is also anticipated to continue to improve as cashflow generation adequately covers the Group’s undemanding capex needs.
The rating remains supported by FRL’s strong market position as one of the world’s top 10 listed plantation firms by planted area. As at end-June 2019, it had a sizeable oil palm planted area of 211,610 ha. The Group’s strong agronomic practices have led to favourable yields that compare fairly well with those of large regional peers with similar tree profiles. In fiscal 2018, its CPO yield rose to 4.1 MT/mature ha against 3.9 MT/mature ha a year earlier. Additionally, FRL remains among the most
cost-efficient players, which will enable it to navigate cyclical challenges, while its relatively young tree profile – where the weighted average age of palms stands at about 12 years – will support long-term production growth.
As with all planters, the rating is constrained by FRL’s exposure to volatile CPO prices and mounting pressure from environmental issues. Compounding these factors is the tougher operating environment in Indonesia that the Group faces.
Karin Koh, CFA
(603) 3385 2508
(603) 3385 2577
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Ratings on First Resources Limited