Published on 24 Mar 2021.
RAM Ratings has assigned a preliminary AA1(bg)/Stable rating to the proposed RM200 mil 5-year tranche under Agroto Business (M) Sdn Bhd’s (Agroto or the Company) ASEAN Sustainability SRI Sukuk Programme of up to RM300 mil. The assigned rating reflects an irrevocable and unconditional guarantee from Sabah Development Bank Berhad (rated AA1/Stable/P1), which enhances the rating beyond Agroto’s stand-alone credit fundamentals. The proceeds will be used to restructure Agroto’s existing bank borrowings, set up a pre-funded reserve account for its profit payments, settle issuance expenses, and finance its future working capital as well as capex.
Agroto was incorporated in 2012, in partnership with the Perak state government - through Perak State Agricultural Development Corporation (SADC). Its mandate is to initiate and implement integrated sustainable vegetable farming in the highlands of Kinta District, Perak. SADC had contributed the 75-year land use rights on the 2,596-acre site 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%-held by CH Kinta Green Valley Sdn Bhd. These two companies are in turn controlled by the Chai founding family.
Agroto is a notable highland vegetable grower in Malaysia, with 101 acres of planted area (as at end-September 2020) and a monthly output of almost 1,000 tonnes. Agroto distinguishes itself through modern planting methods and superior product quality. The Company currently meets all the major certification standards in terms of environmental responsibility as well as food safety and handling. It also boasts prominent customers in the retail and F&B sectors while being able to tap the export market. Agroto’s farming operations are further complemented by collection, processing, packing and storage infrastructure. Despite the movement restrictions imposed amid the COVID-19 pandemic, Agroto’s farm has remained fully operational, unlike smaller farmers whose operations had been affected.
Independent of the bank guarantee, Agroto has a weak stand-alone credit profile. The intensely competitive and highly fragmented vegetable production industry, along with the Company’s lack of scale economies, has been exerting immense pressure on its operating performance. This has strained its cashflow, leading to a fragile liquidity position. It only had less than RM1 mil of unrestricted cash reserves as at end-September 2020.
The transaction documents require two profit payments in the first year to be pre-funded and set aside in the Finance Payment Account, besides the minimum required balance of one profit payment in the Finance Service Reserve Account. Part of the sukuk proceeds (of RM15 mil-RM20 mil) have also been earmarked as working capital and capital expenditure (capex), thus providing some respite against Agroto’s cashflow constraints. In the past, shareholder support in the form of a capital injection and advances to Agroto had helped ease liquidity woes.
Agroto’s credit profile is also tempered by its substantial exposure to customer and product concentration risks. The Company’s top five customers (leading retailers and F&B chains) contributed over 70% of its sales in FY Dec 2019 and 9M FY Dec 2020. This renders Agroto’s performance susceptible to changes in its customers’ fortunes or procurement policies. Similarly, Agroto’s top five crops accounted for some 79% of its sales in 9M FY Dec 2020. Successful expansion of its planted area and market reach will be crucial to the improvement of its financial limitations.
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Ratings on Agroto Business (M) Sdn Bhd