Strong 1H and Robust Prices Mitigate Risk in 2020 for Asian Palm Oil
27.10.2020 (www.fitchratings.com) - Fitch Ratings-Singapore/Jakarta-27 October 2020: Crude palm oil (CPO) prices in 2020 are likely to be significantly better than Fitch Ratings' earlier expectations, due mainly to a slower-than-expected recovery in yields. This should result in higher EBITDA and lower leverage for rated companies. We now assume benchmark CPO prices to average around USD600/tonne(t) in 2020 (2019: USD514/t), compared with our earlier forecast of USD520/t.
Sime Darby Plantation Berhad's (SDP, BBB/ Negative) EBITDA increased by almost two-fold yoy in 1H20, driven primarily by higher CPO prices. Robust 1H20 EBITDA should lead to FFO net leverage falling to around 3x by end-2020 (2019: 5x) compared with our previous expectation of around 5x. We maintain our expectations of negative free cash flow (FCF), albeit at a lower level, as we now see the risk of higher dividends.
PT Tunas Baru Lampung Tbk (TBLA, B+/A(idn)/Negative) reported a 12% increase in 1H20 EBITDA to IDR1.2 trillion, driven by higher CPO and sugar prices. We expect 2H EBITDA to be marginally better than 1H20. We forecast EBITDA to grow by 20% in 2020, while net debt should also rise as a result of negative FCF due to working-capital outflows and sustained capex. We estimate net debt/EBITDA to decline marginally to 3.5x (2019: 3.6x).
We rate PT Ivo Mas Tunggal and PT Sawit Mas Sejahtera at 'A-(idn)'/Stable, based on the consolidated profile of their parent, Golden Agri-Resources Ltd. (GAR). GAR's 1H20 EBITDA, as per Fitch's calculations, grew 2% yoy to USD179 million. Leverage should continue to remain high in 2020, with net debt/EBITDA of over 7.0x, higher than our negative rating action threshold of 6.5x but better than our previous estimate of around 8.0x.