Published on 06 Jan 2020.
RAM Ratings has revised the outlook on Bumitama Agri Ltd’s (the Group) long-term rating to stable, from positive. The revision is premised on the Group’s weaker-than-anticipated performance in fiscal 2019 and our expectation that its credit metrics are unlikely to be restored to levels that are appropriate for a higher rating in the near term.
Bumitama’s operating profit before depreciation and interest (OPBDIT) plunged 41.2% y-o-y in 9M FY Dec 2019. While soft CPO prices were no surprise, the Group’s output of fresh fruit bunches (FFB) fell 4.1% - in contrast to our expectation of a full-year growth of 16%. The unusually dry weather in Indonesia in 2019 has been affecting the Group’s production, particularly at its plantations in West Kalimantan. Most of the estates in this region are cultivated on marginal land (e.g. sandy soil or steep terrain), where yields have been hit by the extended drought last year.
Looking ahead, Bumitama envisages its FFB output growth to rebound almost 20% from the low base in 2019 to more normal levels, as the ill effects of the dry spell begin to dissipate. Beyond 2020, production volumes are envisaged to expand at mid-to-high single digits – after taking into account potential downside risks from uncertain weather conditions. In 10M 2019, CPO prices fell 13% y-o-y – the second consecutive year of double-digit decline - to an average of RM2,009/MT. That said, we anticipate prices to improve to RM2,100/MT-RM2,300/MT this year amid slower production growth and better demand.
With its lacklustre operating performance as well as sustained dividends and capex, Bumitama’s debt level had risen 28.0% y-o-y to IDR6.8 tril as at end-September 2019. This had catapulted its debt-to-OPBDIT ratio to 4.6 times in 9M FY Dec 2019 (9M FY Dec 2018: 2.1 times). Similarly, the Group’s funds from operations debt cover (FFODC) had halved to 0.16 times (9M FY Dec 2018: 0.35 times). That said, its performance is envisaged to improve in 4Q fiscal 2019, buoyed by the recent uptrend in prices and a slight yield recovery (amid dissipating adverse weather effects and a seasonal uptick). For the entire fiscal year, the Group’s debt-to-OPBDIT and FFODC ratios are likely to strengthen to a respective 4 times and 0.20 times.
While Bumitama’s credit metrics will keep strengthening in line with rising production and CPO prices, they may not return to pre-2019 levels anytime soon. The Group’s performance will be limited by its revised, heftier capex requirements. Bumitama’s annual capex and other investments are projected to inflate to about IDR1.5 tril in fiscal 2019 and 2020 (from an average of IDR1.1 tril in the last three years), for the rehabilitation of its poorer-yielding estates and the expansion of its milling capacity. As these will be partly debt-funded, Bumitama’s debt-to-OPBDIT ratio will be kept at about 3 times in fiscal 2020 and 2021 under our sensitised projections. We expect its FFODC to hover around 0.25-0.30 times during this period – still shy of its upward rating triggers.
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Ratings on Bumitama Agri Ltd