Published on 07 Jan 2022.
RAM Ratings has upgraded the rating of Bumitama Agri Ltd’s (Bumitama or the Group) RM2 bil Islamic MTN Sukuk Musharakah (2014/2029) to AA2/Stable from AA3/Stable.
The upgrade reflects our expectations that the Group’s credit metrics will be sustained at levels that are commensurate with an AA2 rating as lofty crude palm oil (CPO) prices have enabled Bumitama to significantly pare down debts. As the Group continues to degear, its credit metrics are anticipated to strengthen further, supported by above-average CPO prices in excess of our previous assumptions, production growth and manageable planned capital expenditure (capex).
CPO prices surged 64% to RM4,277/MT in 10M 2021 due to strong demand and the tight supply of vegetable oils. The global supply of palm oil is expected to stay tight amid a slowdown in new plantings in key producing nations. The doubling of soybean oil prices in the past year due to weather-related disruptions and its growing use in the production of renewable diesel also support a higher floor price for CPO. These factors underpin the sector’s positive fundamentals in the medium term. Against this backdrop, we have conservatively assumed CPO prices to average RM3,000/MT in 2022 and RM2,800/MT in 2023 as demand and supply rebalance. Forecasted prices remain above historical levels (2016-2020: RM2,510/MT average).
Bumitama’s operating profit before depreciation, interest and tax (OPBDIT) leapt 52% in FY Dec 2020 on higher CPO prices (+25%), climbing another 10% in 1H FY Dec 2021 on the back of increased CPO production (+22%) amid yield recovery. Indonesia’s higher export levy and lower than market-average selling prices owing to locked-in forward sales led to the modest increment for 1H FY Dec 2021. As most forward sales agreements were fully realised in 1H 2021, Bumitama registered a strong 3Q performance which pushed its estimated OPBDIT up 39% y-o-y in 9M FY Dec 2021. Greater CPO output (+15%) and lower levies after a July 2021 revision also propped up its performance.
The Group used sturdy cashflow generation from elevated CPO prices to degear its balance sheet. Debts declined 11% y-o-y to IDR6.01 tril as at end-December 2020 before contracting further to IDR5.53 tril as at end-June 2021 to substantially better our projection of IDR6.80 tril-IDR7 tril. Consequently, the Group’s debt to OPBDIT ratio was a markedly improved 2.34 times in FY Dec 2020 and 1H FY Dec 2021 (FY Dec 2019: 3.99 times), comfortably below our threshold of 3 times for a rating upgrade. Gearing eased to 0.52 times as at end-June 2021 (end-December 2019: 0.71 times). Bumitama’s stronger profit showing in 1H FY Dec 2021 and lower debt level bolstered its funds from operations debt cover (FFODC) to an annualised 0.33 times, which is slightly above the AA2 threshold of 0.30 times.
Looking ahead, we expect the Group’s OPBDIT to be sustained at above IDR3 tril in the next two years (five-year average: IDR2.22 tril), even under our assumption of a retracement in CPO prices. Production growth of 5%-7% is expected to offset potentially lower CPO prices. Debt levels will continue to taper off as operational cashflows should sufficiently cover annual capex requirements of around IDR1 tril-IDR1.30 tril. These factors will help support projected improvements in Bumitama’s debt to OPBDIT and FFODC ratios to 0.70-1 time and above 0.60 times, respectively, over the next few years. Gearing levels will be below 0.30 times.
Karin Koh, CFA
(603) 3385 2508
Thong Mun Wai
(603) 3385 2522
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