Published on 02 Sep 2021.
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 our view that the strong credit buffers afforded by its lean cost structure and solid balance sheet will keep FRL’s credit profile resilient in the tougher operating environment amid the pandemic.
The Group’s revenue and operating profit before depreciation, interest and tax jumped 7.4% and 18.5% in FY Dec 2020 respectively, in tandem with higher crude palm oil (CPO) prices. The easing of global lockdowns and the push to roll out Indonesia’s biodiesel mandate have seen recovering demand for CPO. Coupled with weaker output this year, CPO prices in 1H 2021 averaged significantly higher at RM4,052/MT compared to the RM2,765/MT recorded in 2020. Better average selling prices negated the 2.6% dip in FRL’s fresh fruit bunch (FFB) production in FY Dec 2020. The diminished output was mainly attributed to lower yields from lingering dry weather effects since 2019. FFB yields are expected to recover from the drought going forward while CPO prices are expected to remain strong despite the production upcycle in 2H 2021.
Robust cashflow generation from improved earnings sufficiently meets FRL’s capital expenditure requirements. Funds from operations debt coverage increased from 0.37 times to 0.51 times y-o-y in FY Dec 2020, exceeding our projection of 0.47 times. Net gearing eased to 0.22 times from 0.28 times due to better cash retention despite heavier debt load y-o-y of 7.4% at USD441.65 mil. We expect gearing and net gearing to stay below 0.40 times and 0.30 times, respectively. Bullish commodity prices and lower debt levels are anticipated to further boost the Group’s debt coverage.
FRL remains one of the largest listed global oil palm companies by planted hectarage, with a planted area of 213,461 ha as at end-December 2020. The Group is among the more cost-efficient players owing to its long track record and healthy agronomic practices. Its long-term growth prospects are underscored by a relatively young tree maturity profile. As with all planters, FRL’s issue rating is constrained by its exposure to volatile CPO prices and mounting pressure from environmental issues. This is compounded by the more difficult and evolving operating landscape in Indonesia, where the Group’s operations are based.
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Ratings on First Resources Limited