Published on 15 Nov 2021.
RAM Ratings has reaffirmed the AA3(s)/Stable rating of Perbadanan Kemajuan Pertanian Negeri Pahang’s (PKPP or the Agency) RM650 mil Sukuk Wakalah Programme (2020/2050). The rating is supported by the Agency’s robust balance sheet and liquidity position, its key 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 is secured against plantation assets, under RAM’s criteria for well-secured debt. Based on the last appraised market value of the pledged collateral, security cover stood at 1.99 times the outstanding amount, more than the required 1.67 times minimum Security Cover Ratio covenanted under the Programme. Moderating these factors are the Agency’s relatively small size and lack of scale efficiencies, high-cost structure and weak plantation operating metrics.
PKPP is set up as a statutory body, with its main objective to ensure the development of Pahang’s agricultural sector. The Agency is 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 those which are 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 planter, with its plantation operations broadly divided into commercial and social segments. As at end March 2021, PKPP’s total planted hectarage expanded to about 55,000 ha following its successful acquisition of about 16,500 ha of oil palm estates in November 2020. Its social plantations remain at around 5,127 ha (9%) of total oil palm planted area. PKPP has a large portion of ageing trees, which not only affects yields of fresh fruit bunches (FFB) and crude palm oil, but also elevates its unit costs. While the overall tree age profile improved following the recent acquisition, uplift in FFB yields were below expectations due to the relatively poor manuring status of the acquired estates. Nonetheless, we expect the new estates to contribute favourably once they have been rehabilitated. In the meantime, PKPP continues to step up its replanting program and mechanisation efforts to improve its tree aging profile as well as help ease its chronic labour shortage issues.
The movement restrictions imposed by the government to combat the COVID-19 pandemic has worsened the chronic labour shortages for PKPP. The Agency has been operating at approximately half of its required workforce since the onset of the pandemic, causing a significant decline to its FFB production in 2020 (decline of 10.7% y-o-y). Despite the lower production yield, PKPP recorded an 18.8% y-o-y increase in revenue, outperforming our previous projections for FY Dec 2020 by 21%. Likewise, PKPP managed to record its first positive operating profit before depreciation, interest and tax (OPBDIT) in FY Dec 2020 after two years being in the red. However, its margin was compressed at 12.13% as compared to pre-2018 levels (average OPBDIT margin for 2015-2017: 22.3%) on account of increased operational and administrative expenses during the year.
Supported by substantial cash reserves of more than RM500 mil, PKPP is expected to maintain its sturdy balance sheet and healthy liquidity position, despite borrowings spiking up this year following the issuance of its Sukuk Wakalah in October 2020. We expect the Agency’s debt load to hover around RM660 mil through fiscal 2022, with gearing ratio expected to remain below 0.3 times over the same period. With high CPO prices forecasted into the medium term, the Agency’s funds from operations (FFO) debt coverage is expected to improve to 0.3 times in FY Dec 2021, and return to a net cash position over the next three years. Even with lower projected CPO prices under our sensitivity analysis, the Agency is expected to maintain FFO debt coverage ratio of at least 0.11 times over the same period. On a net debt basis, PKPP’s debt coverages are viewed to be very robust.
Hani Hamizah Nor Hashim
(603) 3385 2575
Thong Mun Wai
(603) 3385 2522
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