TFS Corp. Ltd. Ratings Raised To #B+# On Increasing Harvest Outlook Stable

Stocks and Financial Services Press Releases Thursday July 14, 2016 16:05
MELBOURNE--14 Jul--S&P Global Ratings

MELBOURNE (S&P Global Ratings) July 14, 2016--S&P Global Ratings said todaythat it had raised its corporate credit rating on TFS Corp. Ltd. to 'B+', from'B'. The outlook is stable. At the same time, we raised the rating on thecompany's senior secured notes to 'B+', from 'B', and affirmed the recoveryrating at '3'.

"The upgrade on TFS reflects our view that the company's business profile hasimproved due to its successful management of the significant increase inharvest yields and that the company will be a reliable substantial supplier ofIndian sandalwood products," said S&P Global Ratings credit analyst SamHeffernan.

Much of the company-owned harvest for 2016 and 2017 has been forward sold. Inaddition, the global scarcity of Indian sandalwood trees and robust demand forsandalwood products for use in pharmaceutical products, religious practicesand fine fragrance, will continue to support demand.

TFS has improved its operating efficiency through vertical integration of itstwo seedling nurseries, plantation and distillery operations, and its move tobuy out its partner pharmaceutical company Santalis Healthcare earlier in theyear ended June 30, 2016. If the company were to successfully develop andmarket its own pharmaceutical products, we would see this as being a further

positive step-change in the transformation of the business. In addition,multi-year agreements with Chinese and Indian wood buyers and a supplyagreement with Galderma will consume a large proportion of the company's oiland wood production over the near term.

Tempering our view of the company's business profile is the relatively smallscale of current group cash flows, and the company's current geographicconcentration of its mature plantations that can generate cash flows relatedto sandalwood products. TFS's Kununurra plantations are the only plantationsat a mature stage for harvesting. At around 3,700 hectares (ha), theseplantations are the largest in the total plantation area of 10,583 ha. Webelieve the company proactively manages the potential threat of wind, fire,disease, and pests disrupting supply. As the plantations across other areas innorthern Australia reach harvest, this diversity would be positive for therating. We understand, however, that these plantations are at least 10 yearsfrom reaching the required harvest maturity.

An emerging risk for TFS is the upcoming refinancing of its senior unsecurednotes due in July 2018. We believe that the company is well placed to managethis task.

Mr. Heffernan added: "The stable outlook reflects our expectation that TFSwill continue to manage the increase in harvest volumes, and that itsinvestment sales and management fees will remain stable. We also expect thecompany will likely maintain its current level of leverage while it fundsfurther land acquisition and buybacks of investor plantation interests to meetend-market demand."

Further diversity of sandalwood product supply through maturing plantationswould be strongly positive for the rating. However, we understand that asidefrom Kununurra, other plantations are approximately 10 years from reaching therequired maturity for harvesting.

A downgrade could occur if the likely larger harvest yields do not result inan increase in product sales, or if sales to domestic or global investors wereto decline, leading to the company's FFO to debt being sustained below 15%. Wecould also lower the ratings if investment product revenues comprised over 80%of total revenue, leading us to revise our view of the improving stability ofrevenue streams due to the more volatile nature of investment products.

Upward momentum to the rating is limited in the medium term. Positive ratingaction would be dependent on further significant business developments--whichwe see as being some years away--such as an increase in mature plantations anda higher proportion of revenues derived from sandalwood product sales. Inaddition, successful production and marketing of pharmaceutical productsthrough the TFS-owned company, Santalis Healthcare, could provide upwardrating momentum.

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