Published on 30 Apr 2020.
RAM Ratings has assigned a rating of AA1(bg)/Stable to the proposed RM180 mil 5-year tranche of Agroto Business (M) Sdn Bhd’s (Agroto or the Company) ASEAN Sustainability Bond Programme of up to RM300 mil. The rating reflects an irrevocable and unconditional guarantee from Sabah Development Bank Berhad (SDB, rated AA1/Stable/P1), which enhances the bonds’ rating beyond Agroto’s stand-alone credit fundamentals. The bond proceeds will be mainly used to restructure existing bank borrowings, settle issuance expenses and set up a pre-funded reserve account for coupon payments in the first two years.
Incorporated in 2012, Agroto was established in partnership with the Perak state government through Perak State Agricultural Development Corporation (SADC) for the purpose of initiating and implementing integrated sustainable vegetable farming in the highlands of Kinta District, Perak. The 75-year land use rights to the 2,596-acre site were contributed by SADC as part of the capital for its 20% interest in the joint venture. Agroto is 60% owned by CH Kinta Valley Sdn Bhd and 20% owned by CH Kinta Green Valley Sdn Bhd. These two companies are in turn controlled by the Chai founding family.
Independent of the guarantee, Agroto’s stand-alone credit profile is weak. The intensely competitive and highly fragmented nature of the vegetable production industry, along with the Company’s lack of economies of scale, has placed immense pressure on its operating performance. Weakness in Agroto’s operating performance has led to strained cashflows and a fragile liquidity position. Its unrestricted cash balance stood below RM1 mil as at end-December 2019. That said, under the transaction documents, coupon payments for Agroto’s bonds (in the first two years) will be pre-funded by the bond issuance. In the past, shareholder support in the form of a capital injection and advances to Agroto had helped ease liquidity woes. We expect such backing to be forthcoming from the Company’s shareholders, if needed.
Going forward, prospects of a turnaround will largely hinge on Agroto’s ability to scale up its operations. However, this is viewed to be challenging given its financial constraints. Agroto is planning to dispose part of its land use rights to generate capital, although all land sale proceeds are earmarked for the Company’s bond repayment until the bonds are fully repaid.
Agroto’s credit profile is supported by its position as a notable highland vegetable grower in Malaysia, with a planted area of 101 acres and monthly output of close to 1,000 tonnes. Agroto currently meets all major prevailing certification standards in terms of environmental responsibility as well as food safety and handling in the country. Accordingly, it boasts prominent customers in the retail and F&B sectors and is able to tap the export market. Agroto’s farming operations are complemented by collection, processing, packing and storage infrastructures.
Agroto’s credit profile is however tempered by its high exposure to customer and product concentration risks. Its top five customers (which are leading retailers and F&B chains) were responsible for nearly two-thirds of the Company’s sales volume in FY Dec 2019. Such exposure renders Agroto’s performance susceptible to changes in the fortunes or procurement policies of its customers. Further, the Company’s top five crops accounted for around 78% of total sales (by sales value) in FY Dec 2019. Successful expansion of both its planted area and market reach will be crucial towards the turnaround of its current financial limitations.
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Ratings on Agroto Business (M) Sdn Bhd