JAKARTA (TheInsiderStories) – Moody’s Investors Service has affirmed the B1 corporate family rating (CFR) of Sawit Sumbermas Sarana Tbk (P.T.) (SSMS) and the B1 senior unsecured rating on the $300 million notes issued by its wholly owned subsidiary, SSMS Plantation Holdings Pte. Ltd.
At the same time, Moody’s has revised the outlook on these ratings to negative from stable.
“The change in SSMS’ ratings outlook to negative reflects our expectation that SSMS’ credit metrics will remain weak for its B1 ratings over the next 12-18 months, in light of higher than expected borrowings and the limited likelihood of a material increase in earnings through organic growth,” says Maisam Hasnain, a Moody’s Analyst in a latest report.
He continued, “We also expect SSMS’ credit metrics to remain materially outside of our range for the ratings in the absence of debt reduction or an earnings accretive acquisition.”
SSMS’ CFR reflects the credit quality of its parent, Citra Borneo Indah (P.T.) (CBI), which consolidates SSMS. CBI’s credit metrics have weakened in recent years, in part due to elevated capital spending to construct a palm oil refinery and industrial park.
CBI started its refinery operations in mid-2018, which will help increase scale and diversification over the longer term. However, CBI remains exposed to execution and operational risks, and higher start-up costs for the refinery will continue to weigh on CBI’s earnings and cash flows.
Moody’s expects CBI to generate negative operating cash flow in 2018, with adjusted leverage — as measured by adjusted debt to EBITDA — to increase to 4.7x in 2018 from 3.0x in 2016.
As a result, upstream operations of oil palm cultivation and crude palm oil (CPO) production at SSMS will continue to generate a majority of CBI’s consolidated earnings over the next 12 months, and CBI will remain exposed to volatile CPO prices, which fell around 20% in 2018.
CBI’s liquidity is strong, with a large cash balance of around IDR2.2
trillion at 30 September 2018. Such a situation provides some financial flexibility. However, Moody’s does not expect that the company will use these funds to repay debt. Instead, Moody’s expects that CBI will use excess cash to make earnings-accretive acquisitions of palm oil plantations.
“Any plantation acquisitions will take time and entail execution risk, as the company integrates the new businesses into its operations,” adds Hasnain.
In the absence of such acquisitions, Moody’s expects CBI’s adjusted
leverage will be around 4.5x through 2019, continuing to breach the
downward trigger for its B1 CFR of 4.0x.
The negative ratings outlook reflects Moody’s expectations that CBI’s
credit metrics will remain weak for its current ratings, in light of
elevated debt levels, and in the absence of a material increase in
earnings. Upward ratings pressure is unlikely, given the negative ratings outlook.
Nevertheless, the outlook could revert to stable if CBI shows improved earnings or reduced debt, while maintaining prudent financial policies.
Moody’s could downgrade SSMS’ ratings if: (1) CBI fails to implement its business plan, in particular, for its downstream business, such that earnings growth is adversely affected; (2) SSMS undertakes large debt-funded acquisitions for growth, with such acquisitions materially weakening its credit profile; or (3) there is evidence of cash leakage outside of CBI.
Listed on the Indonesian Stock Exchange since December 2013, Sawit Sumbermas Sarana Tbk (P.T.) is a palm oil producer with a market capitalization of around IDR11.4 trillion ($805 million) at 30 January 2018.
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