Published on 29 Dec 2020.
RAM Ratings has reaffirmed the A1(s)/stable rating of the RM5.0 bil Islamic Medium-Term Notes (IMTN) 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 rating reaffirmation is premised on our expectations that GAR will be able to maintain credit metrics that are supportive of its rating. We anticipate some improvement in the Group’s financials in the next two years, backed by dissipating effects of the dry weather that had affected output in 2019 and 2020.
Following the price downcycle and weaker fresh fruit bunch (FFB) production in 2019, GAR’s pace of production decelerated further in 1H FY Dec 2020 (-8.3% y-o-y) amid a prolonged dry spell. This year, the industry has also been tested by demand pressures following the COVID-19 pandemic in major consuming countries. Nonetheless, demand is recovering in line with restocking efforts from China and India and the implementation of the B30 biodiesel mandate in Indonesia. This pushed GAR’s average crude palm oil (CPO) price up to USD616/MT in 1H 2020 (+24.2% y-o-y). That said, the Group’s downstream earnings almost halved in 1H FY Dec 2020, dented by the sudden drop in CPO prices amid COVID-19 related disruptions. This had resulted in a y-o-y weaker operating performance (-2.3% y-o-y) in 1H FY Dec 2020, against the improving trend exhibited by most RAM-rated plantation players over the same span.
As at end-June 2020, GAR’s debt level stayed within our expectations at around USD3.1 bil. However, the Group’s gearing ratio (adjusted for readily marketable inventories (RMI)) weakened slightly to 0.77 times as at end-June 2020 (end-December 2018: 0.72 times) as pre-tax losses in 1H FY Dec 2020 had eroded its equity base. Going forward, we expect GAR’s RMI-adjusted gearing ratio to stay within 0.75 times. Although the Group’s balance sheet had in the past been affected by outflows relating to its private equity investments, such outlays (after netting off capital returns) had tapered to USD41.8 mil in fiscal 2019 (2018: USD130.7 mil). The management expects these investments to have a largely neutral impact to its cashflows from full year 2020 onwards.
Given its healthier operating performance in fiscal 2019 and relatively stable debt load, GAR’s RMI-adjusted FFODC improved to 0.15 times (FY Dec 2018: 0.13 times). While the ratio weakened slightly to 0.10 times in 1H FY Dec 2020, we expect GAR’s RMI-adjusted FFODC to stay at its required level of 0.15 times over the 1-2 years, underpinned by rejuvenated output growth and a fairly stable debt levels. We expect GAR’s FFB production volumes to expand at mid-single digits in the next two years, given better weather conditions although partly offset by replanting activities in Sumatra.
Meanwhile, GAR’s rating continues 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 4.2-4.9 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. While its ageing tree profile (with an average age of 17 years as at end-June 2020) will affect long-term production growth, this is mitigated to some extent by its efforts to replant its estates with higher-yielding seeds.
The above strengths are moderated by GAR’s weaker financial profile, 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.
The issue rating 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.
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Ratings on Golden Assets International Finance Limited