Fitch Ratings: Weaker 2018 Results Raise Palm-Oil Producers' Credit Risk

Golden Agri-Resources

16/04/2019 05:51

(The following statement was released by the rating agency)


Fitch Ratings-Singapore/Jakarta-April 16: The credit profiles of some Asian 
palm-oil producers remain at risk due to limited rating headroom after their 
weak performance in 2018, Fitch Ratings says. A number of Fitch-rated palm-oil 
players posted a decline in EBITDA and higher leverage in 2018, hit by lower 
average crude palm oil (CPO) selling prices despite a growth in output. We 
expect leverage to moderate in 2019 on our expectation of higher CPO prices due 
to a better demand-supply balance, although the ratio may remain above the 
threshold at which we would take negative rating action for some producers. 

Several palm-oil producers, especially in Indonesia, registered healthy growth 
of 10%-15% in their yield from fresh fruit bunches (FFB) in 2018, driven by a 
maturing of acreage and favourable weather conditions. However, the rate of 
increase slowed from 2017 for most of the producers as incremental returns from 
sustained good weather diminished. The weaker improvement in yields last year 
was consistent with US Department of Agriculture data, which showed global 
palm-oil output growth slowing by around 1 million tonnes in the 12 months ended 
October 2018. PT Sawit Sumbermas Sarana Tbk (SSMS; B+/Stable), however, had 
among the highest yields reported as its yield for owned acreage in 2018 jumped 
by a faster pace of around 20% to 25 tonnes per hectare of mature trees.

Palm-oil producers we monitor posted around 20% yoy decline in aggregate EBITDA. 
PT Tunas Baru Lampung Tbk (B+/Stable) was the exception with marginal EBITDA 
growth as weaker CPO prices were offset by higher sales volume of various 
palm-oil products. Operating EBITDA for integrated palm-oil producers such as 
Golden Agri Resources Ltd (GAR) was also hit by lower margins for downstream 
products in Indonesia as a result of a change in the taxation structure. 

Increasing unit cash costs also partly contributed to the decline in earnings 
for some players. SSMS's cash cost per tonne of CPO produced surged by 13% yoy 
in 2018, mainly driven by rising labour and overhead costs.

Capex change across the various companies was mixed although in aggregate 2018 
capex was around 15% higher than 2017, which is in line with the 
capital-intensive nature of the plantation business, with companies continuously 
investing in new planting or replanting.

The decline in EBITDA led to a temporary increase in leverage for a majority of 
our rated portfolio. The increase, however, was moderated to some extent for 
Sime Darby Plantation Berhad (BBB+/Stable) as the company disposed of non-core 
assets to improve its capital structure and we believe it will continue to do 
so. The leverage of GAR and SSMS were above our negative rating sensitivity 
guidelines, suggesting minimal headroom for the ratings. The sensitivity 
guidelines for GAR refer to its subsidiaries - PT  Sinar  Mas  Agro  Resources  
and  Technology  Tbk,  PT  Ivo  Mas  Tunggal  and  PT  Sawit Mas Sejahtera - 
whose 'AA-(idn)'/Stable ratings are based on the parent's consolidated profile.

Contact: 

Akash Gupta

Director

+65 6796 7242

Fitch Ratings Singapore Pte Ltd.

One Raffles Quay

South Tower #22-11

Singapore 048583

Rufina Tam

Associate Director

+62 21 2988 6813

Erlin Salim

Director

+65 6796 7242

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.

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