Photo bY Sawit Sumbermas Sarana

Singapore — Moody’s Investors Service has assigned a first-time B1 corporate family rating (CFR) to Sawit Sumbermas Sarana Tbk (P.T.) (SSMS).

At the same time, Moody’s has assigned a backed senior unsecured bond rating of B1 to the proposed notes to be issued by SSMS Plantation Holdings Pte. Ltd., a wholly owned subsidiary of SSMS.

The proposed bonds will be unconditionally and irrevocably guaranteed by
SSMS and certain subsidiaries, as well as Citra Borneo Indah (P.T.) (CBI), the controlling shareholder of SSMS. The outlook on all ratings is stable.

SSMS will use the net proceeds from the bond issuance to repay its existing secured borrowings with the balance applied for general corporate purposes.

RATINGS RATIONALE

“SSMS’ B1 corporate family rating reflects the credit quality of CBI, which consolidates SSMS, with the benefits ranging from SSMS’ upstream oil palm plantation business and CBI’s downstream businesses,” says Jacintha Poh, a Moody’s Vice President and Senior Analyst.

There are also strong linkages between both companies as (1) CBI is the
parent company and largest shareholder of SSMS, with a stake of around
58% as of 31 October 2017, (2) the majority of CBI’s earnings are derive
from the consolidation of SSMS, and (3) SSMS has provided intercompany
loans to support the expansion plans of CBI.

On a standalone basis, CBI owns 81% stakes in Surya Borneo Industri
(P.T.) (SBI) and Citra Borneo Utama (P.T.) (CBU), which own the downstream refinery and logistics businesses, while SSMS owns the upstream oil palm plantations and the remaining 19% stakes in SBI and CBU.

As of 30 June 2017, SSMS had a total oil palm planted area of 70,603 hectares, located in Kalimantan, Indonesia, and annual production of around 340,000 tons of crude palm oil (CPO). The company also owns six palm oil mills with a total annual capacity of 2.25 million tons and one kernel crushing plant with an annual capacity of 45,000 tons.

The B1 rating is supported by SSMS’ efficient upstream operations where
the company has a track record of profitable and cash generative
operations through the CPO cycle. Historically, SSMS has maintained an
adjusted EBITDA margin of around 50%, owing to its above-average fresh
fruit bunch (FFB) yield of around 20 metric tons (MT) per mature hectare,
compared to an Indonesian industry average of 15-16 MT.

The rating also takes into account the expectation of the increased
diversification and scale provided in CBI’s downstream operations, when
its refinery commences operations in 2018. While this will mean that
EBITDA margins are likely to decline to around 30%-35% on a consolidated
basis, it will allow the company to benefit from a fully integrated
plantation-to-refinery business model.

Despite the continued capital spending required for its downstream
businesses, Moody’s expects CBI’s leverage, as measured by adjusted
debt/EBITDA, to be around 3.5x over the 12-18 months. Liquidity will
also remain adequate over the next 12 months, with minimal refinancing
risk, however banking relationships across the group are limited.

The rating is constrained by (1) CBI’s small scale relative to its
regional peers, (2) the company’s exposure to inherent CPO price
volatility, (3) execution risk of its new downstream operations; (4)
aggressive capital spending on land acquisition to grow its plantation
business, and (5) limited banking relationships.

The ratings outlook is stable, reflecting Moody’s expectation that CBI on
a consolidated basis will maintain a prudent and conservative approach
towards further investments as it pursues growth.

A rating upgrade is unlikely over the near to medium term, but positive
momentum could build, if CBI successfully executes its business plans
and grows its scale, generates positive free cash flows, and demonstrates
a sustained improvement in its financial profile, such that adjusted
debt/EBITDA is below 3.0x, and EBITA/interest expense is above 4.0x. In
particular, Moody’s expects both CBI and SSMS to improve access to
funding with more diversified banking relationships.

SSMS’ ratings could face downward pressure if: (1) CBI fails to implement
its business plan, in particular, for its downstream business, such that
earnings growth is adversely affected; (2) the company undertakes large
debt-funded acquisitions for growth that materially weaken its credit
profile; or (3) there is evidence of cash leakage outside of CBI.

Credit metrics indicative of downward rating pressure include adjusted
debt/EBITDA above 4.0x and adjusted EBITA/interest expense below 2.5x,
all on sustained basis.

Listed on the Indonesian Stock Exchange since December 2013, Sawit
Sumbermas Sarana Tbk (P.T.) (SSMS) is an upstream palm oil producer with
a market capitalization of around IDR14.2 trillion ($1 billion) as of 31
October 2017.

Following the completion of a corporate reorganization at Citra Borneo
Indah (P.T.) (CBI) on 16 October 2017, SSMS is now controlled and owned
by Pak Abdul Rasyid and his family through a 58.5%-stake, as held by CBI;
8.1%, as held by Putra Borneo Agro Lestari; and 2.3%, as held by Jimmy
Adriyanor, as of 31 October 2017.

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