Published on 12 Oct 2020.
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 FRL’s consistently satisfactory financial performance despite the challenging operating landscape amid COVID-19-related demand disruptions and price downcycles in 2019. The Group’s lean cost structure and sturdy balance sheet provide sturdy buffers during tough times.
As expected, FRL’s revenue and operating profit before depreciation, interest and tax (OPBDIT) dipped a respective 2.9% and 15.2% in FY Dec 2019, in tandem with a 13% decline in its average CPO selling price. Poorer earnings pushed its adjusted funds from operations debt cover (FFODC) down from 0.51 to 0.37 times y-o-y, albeit still within our expectations. This year, the industry has been tested further by pandemic-related demand disruptions in major consumer countries.
Nonetheless, demand is showing signs of recovery, in line with the gradual easing of global lockdowns and the B30 biodiesel mandate in Indonesia. These, together with weaker output this year, drove average CPO selling price up 16% y-o-y in 1H 2020. The price rally mitigated the impact of relatively flat productivity in the same period, leading to a 31.2% y-o-y growth in OPBDIT. The Group’s annualised FFODC kept sturdy at 0.37 times despite a slightly higher debt level.
Despite the brighter outlook on CPO prices, production has been decelerating in the lead-up to this year’s peak season (August-October) amid the dry weather last year. This supports our expectation of lower industry output for the full year. Even so, FRL’s credit metrics are envisaged to remain supportive of its rating, partly due to ongoing debt repayment and the absence of major capital expenditure.
FRL boasts a strong market position and reputation as one of the world’s top 10 listed plantation firms, with 212,702 ha of planted area as at end-June 2020. Its long-term growth prospects remain anchored by its expanding mature hectarage and relatively young trees. As with all planters, FRL’s rating is constrained by its exposure to volatile CPO prices and mounting pressure from environmental issues. This is compounded by the tougher operating environment in Indonesia, where the Group’s operations are based.
Thong Mun Wai
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Ratings on First Resources Limited