Published on 29 Dec 2021.
RAM Ratings has reaffirmed Genting Plantations Berhad’s (the Group) AA2/Stable/P1 corporate credit ratings and the AA2(s)/Stable rating of the RM1.5 bil Sukuk Murabahah Programme (2015/2030) under the Group’s wholly owned funding conduit, Benih Restu Berhad.
The reaffirmation is premised on our view that Genting Plantations’ credit metrics will remain sound, supported by strong crude palm oil (CPO) prices amid favourable supply-demand dynamics. This allowed the Group to achieve better than expected financial performances in FY Dec 2020 and 9M FY Dec 2021 despite constrained production levels. A positive rating action may be warranted if the Group can demonstrate more stable and sustainable credit metrics deriving from intrinsic operational or financial improvements.
CPO prices averaged RM2,686/MT in 2020 (2019: RM2,079/MT) before trending higher to RM4,277/MT in 10M 2021 to exceed our expectations of RM2,400/MT for 2020 and RM2,300/MT for the whole of 2021. Consequently, the Group’s operating profit before depreciation, interest and tax increased 35.4% to RM592.2 mil in FY Dec 2020, jumping 76.6% y-o-y to RM688.7 mil in 9M FY Dec 2021. In line with better earnings, funds from operations (FFO) net debt coverage improved to 0.81 times in 9M FY Dec 2021 (FY Dec 2019: 0.36 times). Genting Plantations’ balance sheet stayed healthy, with net gearing easing to 0.20 times as at end-September 2021 (end-December 2019: 0.21 times). Improved earnings facilitated a higher dividend distribution, keeping the dividend payout ratio stable.
In the near term, CPO prices will be supported by rising consumption as economies recover from the pandemic as well as CPO’s current steep discount to soybean oil. The soybean oil price has itself doubled in the past year due to tight supply caused by weather-related disruptions and its increased use in the production of renewable diesel, also known as hydrotreated vegetable oil. We have assumed CPO prices will average RM4,300/MT for full-year 2021 on account of sturdy demand and continued tight vegetable oil supply. Our projections assume prices will ease to RM3,000/MT in 2022 and RM2,800/MT in 2023 as demand and supply rebalance. These levels are still well above the average of the past few years (2016-2020 average: RM2,510/MT).
The Group’s fresh fruit bunch production last year was affected mainly by unfavourable weather conditions but improved slightly in 9M 2021. Larger harvesting areas and higher yields as its younger Indonesian estates mature compensated for slower growth in Malaysia due to replanting activities and the lingering effects of dry weather conditions in 2019. In anticipation of output growth, Genting Plantations commissioned its fifth palm oil mill in Indonesia (Cemerlang Oil Mill) in December 2020. Two other palm oil mills are expected to be completed within the next two years to cater to the improving yields of the Indonesian estates.
Genting Plantations’ plantation management track record is commendable, as seen in its fairly young tree profile, healthy CPO yield and manageable cost structure. As at end-June 2021, the weighted average age of the Group’s palms stood at 12.1 years (end-December 2019: 11.4 years), well within the prime-yielding phase. Genting Plantations’ CPO yield of 3.8-4.0 MT per mature hectare in the last three years remains broadly comparable to that of big regional peers with similar tree profiles.
FFO net debt coverage is anticipated to hover at around 0.70 times in fiscal 2022 and 2023, supported by strong CPO prices and rising output growth, mainly at the Group’s Indonesian estates, barring weather anomalies. We expect net gearing to moderate to below 0.20 times during the same period. A sizeable cash pile and liquid assets built up over the years partly mitigate the Group’s heavy debt load and ensure net gearing stays mild.
Like all planters, Genting Plantations’ ratings are constrained by its exposure to CPO price volatility and increasing scrutiny of environmental and labour rights issues. The Group operates in a more challenging operating environment in Indonesia, where some 63% of its planted area is located. With about half of its borrowings denominated in US dollars and earnings largely priced in ringgit and the Indonesian rupiah, Genting Plantations faces foreign exchange risk. However, as CPO is traded internationally in US dollars, a weaker ringgit and rupiah (or a stronger dollar) will bump up earnings in the local currency, moderating this risk.
The rating of the Sukuk Murabahah Programme under Benih Restu Berhad is backed by an irrevocable and unconditional corporate guarantee from the Group. As such, the enhanced issue rating reflects the Group’s credit profile.
Liew Kar Ling
(603) 3385 2586
Thong Mun Wai
(603) 3385 2522
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Ratings on Genting Plantations Berhad