Fitch Ratings: Weak 1Q19 Results Increase Credit Risk for Palm-Oil Producers

Golden Agri-Resources

25/06/2019 23:42

(The following statement was released by the rating agency)


Fitch Ratings-Singapore-June 25: Some Asian palm-oil producers face increased 
risks in their credit profiles after sustained weak performance in 1Q19, Fitch 
Ratings says. Malaysian benchmark crude palm oil (CPO) prices fell 22% yoy in 
1Q19 and hit earnings mainly for palm-oil producers that had lower upstream 
productivity and lacked diversification into downstream operations. We expect 
CPO prices to improve from current levels, but weak operating performance, 
potential acquisitions and a lack of asset disposals are some other risks for 
their credit profiles. 

Several producers in Indonesia had flat-to-lower yoy fresh fruit bunches (FFB) 
yield in 1Q19. PT Tunas Baru Lampung Tbk's (TBLA, B+/Stable) yield was flat, 
while PT Sawit Sumbermas Sarana Tbk (SSMS, B+/Stable) and First Resources 
reported yield declines of 16% and 12%, respectively. On the other hand, yield 
for PT Dharma Satya Nusantara Tbk's own acreage jumped 37% yoy. Malaysian 
producers such as Sime Darby Plantation Berhad (SDP, BBB+/Stable) and IOI 
Corporation Bhd saw single-digit improvement in yields. 

The decline in productivity for some Indonesian producers appears to be at odds 
with an overall 21% jump in Indonesia's palm-oil output in 1Q19, according to 
data by industry body GAPKI. However, overall output may have risen due to an 
increase in mature acreage. Nonetheless, we believe that weak prices have 
started to affect operations at some smaller producers and are likely to cap 
yield improvement for the full year. As a result, the rate of production growth 
should moderate over the next 12-18 months. The USDA also estimates that growth 
in global palm-oil production, which is dominated by Indonesia and Malaysia, 
will slow in 2019-2020.  

The palm-oil companies we rate reported a wide divergence in yoy EBITDA change. 
TBLA and Golden Agri-Resources Ltd. (GAR) reported broadly flat EBITDA in 1Q19 
as lower upstream earnings from FFB and CPO production were largely offset by 
higher profits from downstream operations. Fitch rates GAR's subsidiaries - PT  
Sinar  Mas  Agro  Resources  and  Technology  Tbk,  PT  Ivo  Mas  Tunggal  and  
PT  Sawit Mas Sejahtera - at 'AA-(idn)'/Stable based on the parent's 
consolidated profile. 

However, SSMS's EBITDA dropped by 37% as a lower CPO price was compounded by 
weaker upstream productivity in the absence of downstream diversification. SDP, 
despite its significant downstream exposure, reported 23% lower EBITDA due to a 
sharp 71% fall in upstream EBIT. While SDP's upstream operations in Malaysia 
reported a 55% fall, its operations in Papua New Guinea and Solomon Islands 
reported losses at the EBIT level. 

The sharp decline in EBITDA in 1Q19 for SSMS and SDP has raised leverage further 
from end-2018 levels, resulting in significantly reduced rating headroom. Our 
expectations for an improvement in CPO prices should result in higher EBITDA and 
better leverage metrics, but additional factors are also important for the 
companies to maintain metrics consistent with their rating levels. SSMS's 
inability to maintain yields and control costs could weaken its financial and 
credit profile, in addition to potential acquisitions. SDP is pursuing 
initiatives to monetise some of its assets but an inability to generate material 
cash inflows could be credit-negative.

Contact: 

Akash Gupta

Director

+65 6796 7242

Fitch Ratings Singapore Pte Ltd.

One Raffles Quay

South Tower #22-11

Singapore 048583

Erlin Salim

Director

+65 6796 7259

Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: 
peter.hoflich@thefitchgroup.com; Leslie Tan, Singapore, Tel: +65 6796 7234, 
Email: leslie.tan@thefitchgroup.com.

Additional information is available on www.fitchratings.com

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:  
HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING 
DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S 
PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND 
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF 
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, 
AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF 
CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE 
AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE 
PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD 
PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED 
IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS 
ISSUER ON THE FITCH WEBSITE.

Copyright © 2019 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its 
subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, 
(212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or 
in part is prohibited except by permission. All rights reserved. In issuing and 
maintaining its ratings and in making other reports (including forecast 
information), Fitch relies on factual information it receives from issuers and 
underwriters and from other sources Fitch believes to be credible. Fitch 
conducts a reasonable investigation of the factual information relied upon by it 
in accordance with its ratings methodology, and obtains reasonable verification 
of that information from independent sources, to the extent such sources are 
available for a given security or in a given jurisdiction. The manner of Fitch's 
factual investigation and the scope of the third-party verification it obtains 
will vary depending on the nature of the rated security and its issuer, the 
requirements and practices in the jurisdiction in which the rated security is 
offered and sold and/or the issuer is located, the availability and nature of 
relevant public information, access to the management of the issuer and its 
advisers, the availability of pre-existing third-party verifications such as 
audit reports, agreed-upon procedures letters, appraisals, actuarial reports, 
engineering reports, legal opinions and other reports provided by third parties, 
the availability of independent and competent third- party verification sources 
with respect to the particular security or in the particular jurisdiction of the 
issuer, and a variety of other factors. Users of Fitch's ratings and reports 
should understand that neither an enhanced factual investigation nor any 
third-party verification can ensure that all of the information Fitch relies on 
in connection with a rating or a report will be accurate and complete. 
Ultimately, the issuer and its advisers are responsible for the accuracy of the 
information they provide to Fitch and to the market in offering documents and 
other reports. In issuing its ratings and its reports, Fitch must rely on the 
work of experts, including independent auditors with respect to financial 
statements and attorneys with respect to legal and tax matters. Further, ratings 
and forecasts of financial and other information are inherently forward-looking 
and embody assumptions and predictions about future events that by their nature 
cannot be verified as facts. As a result, despite any verification of current 
facts, ratings and forecasts can be affected by future events or conditions that 
were not anticipated at the time a rating or forecast was issued or affirmed. 

The information in this report is provided "as is" without any representation or 
warranty of any kind, and Fitch does not represent or warrant that the report or 
any of its contents will meet any of the requirements of a recipient of the 
report. A Fitch rating is an opinion as to the creditworthiness of a security. 
This opinion and reports made by Fitch are based on established criteria and 
methodologies that Fitch is continuously evaluating and updating. Therefore, 
ratings and reports are the collective work product of Fitch and no individual, 
or group of individuals, is solely responsible for a rating or   a report. The 
rating does not address the risk of loss due to risks other than credit risk, 
unless such risk is specifically mentioned. Fitch is not engaged in the offer or 
sale of any security. All Fitch reports have shared authorship. Individuals 
identified in a Fitch report were involved in, but are not solely responsible 
for, the opinions stated therein. The individuals are named for contact purposes 
only. A report providing a Fitch rating is neither a prospectus nor a substitute 
for the information assembled, verified and presented to investors by the issuer 
and its agents in connection with the sale of the securities. Ratings may be 
changed or withdrawn at any time for any reason in the sole discretion of Fitch. 
Fitch does not provide investment advice of any sort. Ratings are not a 
recommendation to buy, sell, or hold any security. Ratings do not comment on the 
adequacy of market price, the suitability of any security for a particular 
investor, or the tax-exempt nature or taxability of payments made in respect to 
any security. Fitch receives fees from issuers, insurers, guarantors, other 
obligors, and underwriters for rating securities. Such fees generally vary from 
US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In 
certain cases, Fitch will rate all or a number of issues issued by a particular 
issuer, or insured or guaranteed by a particular insurer or guarantor, for a 
single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 
(or the applicable currency equivalent). The assignment, publication, or 
dissemination of a rating by Fitch shall not constitute a consent by Fitch to 
use its name as an expert in connection with any registration statement filed 
under the United States securities laws, the Financial Services and Markets Act 
of 2000 of the United Kingdom, or the securities laws of any particular 
jurisdiction. Due to the relative efficiency of electronic publishing and 
distribution, Fitch research may be available to electronic subscribers up to 
three days earlier than to print subscribers. 

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd 
holds an Australian financial services license (AFS license no. 337123) which 
authorizes it to provide credit ratings to wholesale clients only. Credit 
ratings information published by Fitch is not intended to be used by persons who 
are retail clients within the meaning of the Corporations Act 2001

Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange 
Commission as a Nationally Recognized Statistical Rating Organization (the 
"NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on 
Item 3 of Form NRSRO and as such are authorized to issue credit ratings on 
behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other 
credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and 
therefore credit ratings issued by those subsidiaries are not issued on behalf 
of the NRSRO. However, non-NRSRO personnel may participate in determining credit 
ratings issued by or on behalf of the NRSRO