MARC has affirmed its MARC-1ID/AAAID ratings on Sime Darby Berhad's (Sime Darby) RM4.5 billion Islamic Medium-Term Notes Programme (IMTN Programme) and RM500.0 million Islamic Commercial Papers (ICP) with a combined limit of RM4.5 billion (ICP/IMTN Programme). The outlook on the ratings is stable.
MARC's rating affirmation takes into consideration the challenging operating environment for Sime Darby's key business segments, mainly plantation and industrial, which have weighed on the group's earnings. This notwithstanding, Sime Darby's diverse and sizeable business segments across many geographies, combined with its healthy liquidity position, have limited the downside risks to its consolidated credit profile. The affirmed ratings also incorporate MARC's expectations that the group will maintain its financial metrics in line with the current rating bands following the largely debt-funded acquisition of New Britain Palm Oil Limited (NBPOL) for RM6.0 billion. With an 83:17 financing mix, Sime Darby has added RM5.0 billion to its borrowings, bringing the total pro forma borrowings to RM17.5 billion from RM11.6 billion at end-December 2014. This will translate into a debt-equity ratio of 0.58 times (end-December 2014: 0.40 times).
MARC regards the NBPOL purchase as a credit positive in that it will further strengthen Sime Darby's commendable global market position in the palm oil industry. The Papua New Guinea-based NBPOL will add 79,884 ha of fully planted area, 12 crude palm oil (CPO) mills and two refineries, one each in Papua New Guinea and the UK to Sime Darby's existing 525,290 ha, 59 CPO mills and 10 refineries. In addition, the RSPO-certified NBPOL will enhance accessibility to the euro zone markets for Sime Darby's palm oil products. Notwithstanding any potential integration or cross-border risks, these positives from the acquisition should temper the prevailing subdued market conditions for palm oil. The plantation division registered a lower average CPO price of RM2,154/MT for the first half of financial year ended December 31, 2014 (1HFY2015) (1HFY2014: RM2,377/MT). As a result, revenue and pre-tax profit declined by 8.1% y-o-y and 26.6% y-o-y to RM4,691.1 million and RM559.1 million in 1HFY2015 (1HFY2014: RM5,107.2 million; RM762.1 million).
MARC expects the challenging prospects for the plantation division to weigh on group earnings for FY2015 given that the division has historically accounted for about 45% of consolidated group pre-tax profits. Over the medium term, the rating agency believes NBPOL's favourable fresh fruit bunch yield and oil extraction rate (21.7MT/ha; 22.2%) will enhance the group's overall productivity level (Sime Darby: 20.4MT/ha; 21.9%). Meanwhile, the group's industrial division has been affected by the slowdown in the Australian mining sector, resulting in the lower sales performance of heavy equipment and contributing to a 46.3% y-o-y decline in pre-tax profit to RM316.2 million in 1HFY2015 (1HFY2014: RM588.7 million). The weak outlook for the heavy equipment segment, exacerbated by the economic slowdown in China, is likely to weigh on the industrial division's performance over the near term.
Sime Darby's motors division has remained somewhat resilient, registering only a marginal decline in pre-tax profits to RM248.2 million in 1HFY2015 (1HFY2014: RM260.0 million) despite tight credit lending conditions and margin pressures in many of the Asia Pacific markets. The division has registered improving performance for its truck sales in New Zealand and the newly acquired BMW business in Australia and Vietnam. MARC observes that Sime Darby has exited from the power sub-segment in its energy and utilities division with the disposals of its power plants in Port Dickson, Malaysia and Thailand for RM300.0 million and RM407.6 million respectively in FY2014.
Sime Darby's part-disposal of its stake in Eastern & Oriental Berhad provided a RM55.5 million one-off gain for the property division in 1HFY2015; the division recorded sharp improvement with revenue of RM1,044.4 million and pre-tax profit of RM199.2 million in 1HFY2015 (1HFY2014: RM884.5 million; RM137.7 million) on the back of ongoing development of the Pagoh Education Hub and average take-up rate of about 73.3% for its ongoing property projects. MARC views that the group's diverse property mix that includes sizeable offerings to the middle-income group provides a buffer against headwinds in the domestic property market. Unbilled sales of RM2.1 billion as at end-December 2014 and the good take-up rate on its joint-venture Battersea project in London are expected to provide medium-term earnings visibility for the division.
For 1HFY2015, the group's consolidated revenue and earnings declined by 2.0% y-o-y and 23.9% y-o-y to RM20.9 billion and RM991.4 million respectively (1HFY2014: RM21.3 billion; RM1.3 billion) in line with the weaker performance across its key segments. In addition, higher interest cost of RM225.6 million (1HFY2014: RM205.9 million) on increased borrowings dampened earnings. Interest cost is expected to rise in tandem with the increase in group borrowings. However, at the holding company level, debt is not expected to rise sharply as the NBPOL acquisition is mainly funded at subsidiary levels. As at end-June 2014, holding company debt stood lower at RM2.6 billion (FY2013: RM2.9 billion), improving its leverage ratio to 0.20 times (FY2013: 0.23 times).
The plantation division is expected to remain the main dividend contributor to the holding company; it accounted for 49.1% of RM2.0 billion in dividends received in FY2014 (FY2013: RM1.7 billion). While the acquisition of NBPOL is earnings accretive from the outset, Sime Darby is expected to implement further measures to moderate the impact of the acquisition costs. In addition to the dividend reinvestment plan introduced in FY2014, the measures will include utilising part proceeds from the anticipated listing of the motors division to reduce borrowing levels. The group's liquidity position remains strong with cash balance of about RM4.6 billion as at end-1HFY2015. The next scheduled repayment of RM1.0 billion under the rated IMTN programmes is due in November 2016.
The stable outlook reflects MARC's expectations that Sime Darby's credit metrics will remain commensurate with its current ratings over the near term. Pressure on the ratings would emerge if the group were to undertake further sizeable debt-funded acquisitions or if persistent weakness in its key businesses erode its credit profile.
Contacts: Jasmine Kua, +603-2082 2280/ jasmine@marc.com.my; Taufiq Kamal, +603-2082 2251/ taufiq@marc.com.my.
© Press Release 2015
