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April 23 (The following statement was released by the rating agency)
Fitch has affirmed Indonesia-based PT Sinar Mas Agro Resources and Technology Tbk's
(SMART) National Long-Term Rating at 'AA (idn)' and revised its Outlook to Positive
Simultaneously, Fitch has affirmed SMART's 2012 IDR1trn bonds due in 2017 and 2019 issued
under its IDR3trn bond programme at 'AA(idn)'.
Key Rating Drivers
Improved funding access: The outlook revision reflects SMART's ultimate
shareholder Golden Agri Resources' (GAR) improved access to debt and capital
markets. GAR and its subsidiaries have issued close to USD1bn of debt
instruments in 2012. The financing success is positive for the SMART's rating,
as the GAR group's history of debt restructuring was an important factor
constraining SMART's ratings in the past.
Strong parental linkage: SMART's ratings continue to reflect strong strategic
and operational linkages with GAR, with SMART contributing to about 30% of the
group's mature plantation and Crude Palm Oil (CPO) production. Also, SMART
channels export sales through the group's trading arm Golden Agri International
(GAI), and GAR guarantees some of SMART's debt.
Sizeable operating scale: The ratings also reflect GAR's position as having the
world's second-largest palm oil plantation by planted area with a favourable age
profile. This should lend support to group's ability to generate strong cash
flow over the medium term on the back of a continued strong demand for CPO and
Deleverage after 2013: On a consolidated basis, leverage as measured by FFO to
gross debt stood at 3.5x at end-2012. This was mainly driven by significant new
borrowings coupled with lower cash flow generation as the CPO price weakened.
Fitch expects GAR to deleverage after 2013, based on the agency's expectation of
an average CPO price at USD800/ton, increasing palm oil output, timely capex
execution and amortising debts.
Moderate capex risks: The group's capex continues to focus on both downstream
and upstream expansions, with the latter also including overseas investments in
a palm oil plantation project in Liberia. This project carries moderate
execution risk considering the group's limited track record in managing
plantation overseas . Fitch draws comfort from the group's long-dated experience
in the palm oil business and the fact that it has secured USD500m in project
financing from China Development Bank to fund initial planting activities.
Commodity price volatility.. The group's large operating scale and established
downstream operation create a buffer for the inherent cyclicality of CPO, as
they provide economies of scale and stabilise profitability. As the group
increases its refined product output, the EBITDA margin is expected to stabilise
at around low double digits over the medium term (end-2012: 12.3%)
Negative: Future developments that may, individually or collectively, lead to
negative rating action include
-Sustained increase in leverage to above 3.5x. This could result from delayed
deleveraging after 2013 from significant capex overruns.
Positive: Future developments that may, individually or collectively, lead to
positive rating action include
-Ability to execute capex timely, leading to leverage below 2.5x in the next 12