Published on 03 Jan 2020.
RAM Ratings has reaffirmed the A1(s)/stable rating of the RM5.0 bil Islamic MTN Programme (2012/2027) issued by Golden Assets International Finance Limited, a funding conduit for Indonesia-based plantation company Golden Agri-Resources Ltd (GAR or the Group). The reaffirmation of the rating is premised on our expectation that GAR’s funds from operations debt coverage (FFODC) will hover around 0.15 times through the next couple of years, after adjusting its debts for readily marketable inventory (RMI) and refundable taxes. This is because a slight reduction in its debts will offset the impact from weaker production.
GAR’s operating profit before depreciation, interest and tax fell a respective 26% and 19% in FY Dec 2018 and 9M FY Dec 2019, as sluggish CPO prices (-17% and -18%) had dragged down its performance, thereby negating its strong output growth in fiscal 2018 (+12%). Compounded by weaker CPO production (-6%) last year, the Group slipped into the red in 9M FY Dec 2019. Its overall performance was poorer than expected as both CPO prices and output had underperformed – a trend exhibited by most RAM-rated plantation companies. GAR estimates mild output declines in 2019 and 2020, as opposed to our original forecast of marginal growth.
As at end-September 2019, the Group’s debt load stayed heftier than expected at USD3.13 bil. Our earlier expectation of gradual debt repayment has been derailed by soft CPO prices and hefty cash outlays on long-term investments. Corporate guarantees extended to JVs had exacerbated GAR’s adjusted debt load. Consequently, its annualised RMI-adjusted FFODC thinned to 0.11 times in 9M fiscal 2019 (fiscal 2018: 0.13 times). As capex can be met by operating cashflow, GAR’s debt level is likely to hover around USD2.8 bil-USD3.0 bil through the next few years, translating into an adequate RMI-adjusted FFODC of about 0.15 times.
Meanwhile, the Group’s ratings continue to reflect its dominant position as the biggest plantation company in Indonesia and the world’s second largest, complemented by an integrated business model. GAR’s CPO yield of 4.2-5.0 MT per mature hectare in the last five years compares favourably against those of its big regional peers, underpinned by the Group’s sophisticated plantation-monitoring system. Although its production cost is fairly low, its upstream margins lag those of its peers due to sizeable external purchases of fresh fruit bunches. Although its ageing tree profile, with an average age of 17 years as at end-September 2019, will affect long-term production growth, this is mitigated to some extent by its efforts to replant its estates with higher-yielding seeds.
Meanwhile, the rating is moderated by the Group’s hefty debts, significant exposure to volatile CPO prices and mounting pressure from environmental and social issues. GAR also operates within a more challenging operating environment in Indonesia, where the regulatory framework is still evolving, and protracted negotiations with land owners and infrastructure bottlenecks are common. Moreover, the rating incorporates its debt-rescheduling history.
The rating also reflects GAR’s credit risks due to the Group’s irrevocable and unconditional undertaking to the Trustee, for the benefit of the sukukholders, to fulfil its obligations to Golden Assets vis-à-vis meeting principal and profit payments or any amount falling due under the IMTN.
Karin Koh, CFA
(603) 3385 2508
(603) 3385 2577
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Ratings on Golden Assets International Finance Limited