Published on 17 Aug 2020.
RAM Ratings has assigned an AA3(s)/Stable preliminary rating to Perbadanan Kemajuan Pertanian Negeri Pahang’s (PKPP or the Agency) proposed RM650 mil Sukuk Wakalah Programme (2020/2050). The rating is supported by the Agency’s robust balance sheet and liquidity position, important role in supporting agricultural development in Pahang, and financial flexibility derived from the Pahang State Government (the State). The rating also enjoys a one-notch enhancement as the sukuk will be secured against assets with a market value of at least 1.67 times the outstanding amount.
PKPP had been set up as a statutory body, with the main objective of ensuring the development of Pahang’s agricultural sector. The Agency has been tasked with improving the living standards of the rural community by providing the requisite infrastructure for agricultural activities and implementing entrepreneur development programmes. It is also committed to supporting the State’s projects and entities, including non-agricultural related, to which it has contributed more than RM100 mil in the last six years.
The Agency is a relatively small oil palm plantation player, with about 42,000 ha of planted area (as at end-December 2019), including 5,500 ha of plantations related to its social initiatives. PKPP has ageing trees, of which 51% are past their prime (older than 18 years). This affects yields of fresh fruit bunches (FFB) and crude palm oil (CPO), which are below both Pahang and national averages. The Agency also faces elevated costs, compounded by its fragmented and small individual estates. In the last two years, lower yields arising from labour shortage and soft CPO prices have led to operating losses for the Agency.
PKPP is currently acquiring 16,500 ha of mainly oil palm estates. This will boost its planted area to about 56,000 ha. These plantations will also improve the Agency’s tree maturity profile, with a more ideal spread of young and prime trees that are anticipated to lift FFB yields. In addition, PKPP plans to step up its replanting efforts to address its still relatively large proportion of past-prime trees. It will keep up its mechanisation efforts, which have helped raise yields and ease labour shortage issues.
The acquisition of the said plantations, at an estimated cost of RM950 mil, will be financed by the issuance proceeds from PKPP’s proposed Sukuk Wakalah and internal funds. As the Agency has historically maintained very low debt levels, amounting to RM11.84 mil as at end-December 2019, its borrowings are envisaged to spike this year and hover around RM660 mil through fiscal 2022. Despite that, PKPP is anticipated to maintain its sturdy balance sheet, keeping its gearing ratio below 0.3 times. Its healthy liquidity position will be supported by at least RM500 mil of cash reserves. As such, PKPP’s net gearing ratio is expected to remain below 0.1 times.
Looking ahead, the Agency’s earnings and cashflow are projected to improve in line with its yields, underpinned by its more ideally distributed tree maturity profile and increased mechanisation. Given the spike in its debt level, PKPP’s funds from operations (FFO) debt coverage is expected to come in at a weak 0.1 times over the next three years. Considering its cash holdings, however, the Agency’s FFO net debt coverage is envisaged to stay above 0.4 times over the same span. Notably, PKPP enjoys substantial financial flexibility from the State, highlighting its importance in agricultural development and as a key contributor to Pahang.
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