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RAM Ratings reaffirms guarantee-enhanced AA1 rating of Agroto’s sukuk

Published on 28 Jul 2022.

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RAM Ratings has reaffirmed the AA1(bg)/Stable rating of the RM200 mil five-year tranche under Agroto Business (M) Sdn Bhd’s (Agroto or the Company) ASEAN Sustainability SRI Sukuk Programme of up to RM300 mil. 

The rating reflects an irrevocable and unconditional guarantee extended by Sabah Development Bank Berhad (rated AA1/Stable/P1) which enhances the credit standing of the five-year tranche beyond Agroto’s standalone credit strength. Agroto is a notable vegetable grower in Malaysia, with 110 acres of planted area in Kinta Highlands, Perak. 

While farming operations remained fully operational during pandemic-induced lockdowns, Agroto did face some disruption in the supply of planting materials and product delivery to customers. The overall impact however is considered manageable.

Our financial analysis is based on the consolidated financials of Agroto’s parent, CH Kinta Valley Sdn Bhd (CH Kinta or the Group), which consolidates the accounts of the Company and its wholly owned subsidiary, Natural Fresh Marketing (M) Sdn Bhd) as a proxy for Agroto’s consolidated financial position; Agroto does not prepare consolidated financial statements but will do so from FY Dec 2021 onwards. In FY Dec 2021, CH Kinta’s revenue improved by 20.8% to RM44.6 mil (FY Dec 2020: RM36.9 mil) despite a weaker sales volume (-4.7%), thanks to higher selling prices. Increased input costs (such as fertilisers and chemical) nevertheless broadened its operating loss to RM3.3 mil (FY Dec 2020: RM2.8 mil loss). 

Reflective of operating losses, CH Kinta’s cash generating ability is weak, with funds from operations still in negative territory in fiscal 2021. As at end-December 2021, the Group’s gearing climbed to 1.03 times (end-December 2020: 0.63 times) in view of a heavier debt load subsequent to the drawdown of the RM200 mil sukuk tranche and continued erosion of retained earnings.

To cater to the strong demand for vegetables and raise production to a profitable level, Agroto embarked on an expansion plan this year which targets an increase in planted area to about 280 acres (+170 acres) over the next three years. This will translate into an annual production volume of close to 30 million kg of vegetables from 2024 onwards (2021: 10 million kg). Agroto currently meets all major prevailing certification standards in terms of environmental responsibility as well as food safety and handling in Malaysia. It boasts prominent multinational clientele in the domestic retail and F&B sectors. The Company’s superior product quality has also enabled it to gain access to more demanding export markets like Singapore. 

In May 2022, Agroto completed a shareholding restructuring exercise which saw the entry of a new shareholder – Two Trees Farm Sdn Bhd – and the exit of Perak State Agricultural Development Corporation (SADC) and CH Kinta Green Valley Sdn Bhd (CH Kinta Green). The Company is now jointly owned by CH Kinta Valley and Two Trees Farm on a 50:50 basis (previous shareholding: CH Kinta – 60%, CH Kinta Green – 20% and SADC – 20%). Post restructuring, CH Kinta continues to run the Company’s daily operations. Two Trees Farm has three of Agroto’s seven board seats and therefore will have significant influence over the Company’s strategic direction going forward. Following SADC’s exit, Agroto’s right to use the land and the terms of its lease remain intact (the 75-year land use right was contributed by SADC as part of the capital for its 20% interest in Agroto when the Company was established in 2012).

Excluding the bank guarantee, the Company’s standalone credit profile is weak. Intense competition within the fragmented vegetable market and limited capacity have strained Agroto’s operating and financial performance. Although planned expansion in the near term is expected to reduce capacity constraints, this will be dependent on the Company’s ability to secure additional funding to implement it. Agroto’s credit profile is also tempered by substantial exposure to customer and product concentration risks. 

While a profit payment due in August 2022 has been pre-funded and set aside in the transaction’s Finance Payment Account, profit payment obligations from 2023 onwards will have to be satisfied by Agroto’s cashflow generation. We understand that financial support from current shareholders are expected to be forthcoming to ease liquidity pressure if the Company does not generate sufficient cash to meet its obligations. 

The entry of Two Trees Farm is viewed positively as it brings in a shareholder with the financial resources needed to help Agroto expand. We understand that CH Kinta will be able to clear off its debts at the holding company level from the dilution of its stake. This will free up its balance sheet to further support Agroto. In the past, CH Kinta had extended support in the form of capital injection and advances to help ease liquidity woes. As at end-December 2021, shareholder advances came up to RM25.3 mil.

 

Analytical contacts
Wong Ee Loo 
(603) 3385 2521
eeloo@ram.com.my

Thong Mun Wai
(603) 3385 222
munwai@ram.com.my

 

The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.

RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.

Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.

Published by RAM Rating Services Berhad
© Copyright 2022 by RAM Rating Services Berhad



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