TEXT-Fitch rates Indonesia's Sawit Mas Sejahtera 'AA(idn)'; outlook stable
(The following statement was released by the rating agency)
Sept 06 - Fitch Ratings has assigned Indonesia-based plantation company, PT Sawit Mas Sejahtera (SMS), a National Long-Term rating of 'AA(idn)' with a Stable Outlook.
In line with Fitch's Parent and Subsidiary Rating Methodology, the rating reflects strong legal, operating, and strategic linkages between SMS and its 100% parent Golden Agri Resources Ltd (GAR). SMS is the third-largest plantation company owned by GAR, contributing around 17% and 18% of the group's consolidated planted area and crude palm oil (CPO) production, respectively, as of end-March 2012. The linkages are also manifested in SMS channelling around 85% of its sales through GAR group companies, and in GAR guaranteeing SMS's bank facility from Indonesia Exim Bank.
The rating factors in GAR's position as the world's leading palm oil plantation company; second-largest by planted area and third-largest by CPO production. The rating also takes into account the group's favourable plantation profile. As of 31 March 2012, around 50.5% out of its matured plantation was at their most productive age, ensuring cash flow generation over the medium term; while 21.9% was classified as young plantation, securing longer term growth. In addition, GAR's integrated palm oil operation provides some resilience against volatility in CPO prices.
SMS's matured plantation is also the third-largest within GAR, contributing around 18% of the group's matured area as of March 2012. SMS also shares GAR's high own-plantation contribution at more than 70% of total planted area, supporting the group's favourable cost structure by limiting their reliance on more expensive external fresh fruit bunch purchases. Further, SMS's average plantation age of 16 years is considered the most productive age within palm oil lifecycles, further contributing to GAR's overall FFB productivity.
SMS's medium-term expansion plans include regular replanting programmes, expansion of planted area, additional kernel crushing plants (KCP) and setting up a refining facility, which should gradually help diversify the company's sales portfolio towards refined products away from its current concentration in CPO.
The rating is constrained by the inherent cyclicality and volatility of CPO as a commodity. In addition, the history of debt restructuring at companies controlled by the Widjaja family, GAR's major shareholder, may affect SMS's ability to access banks and the debt capital market. Nevertheless, SMS's sister company, PT Sinar Mas Agro Resources and Technology Tbk, has successfully launched its first domestic bond in July 2012, underlining the group's improved access to debt markets. Fitch expects this to further improve as the group establishes a satisfactory track record in debt capital markets.
The Stable Outlook reflects Fitch's expectation that GAR will be able to maintain its current financial profile over the next 12 to 24 months. This is characterised by EBITDA margins of around 17%, manageable funds from operation (FFO)-adjusted leverage below 2x, and comfortable liquidity.
What could trigger a rating action?
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-GAR's FFO-adjusted leverage increasing over 2.5x on a sustained basis
-A weakening linkage between SMS and GAR, such as a reduction in GAR's ownership of SMS
Given the already high rating level and the volatile nature of SMS's operation, no positive rating action is envisaged in the next 12 months.
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