MARC has assigned a preliminary rating of AAIS to Sime Darby Berhad's (Sime Darby) Perpetual Subordinated Sukuk Programme (Perpetual Sukuk) of up to RM3.0 billion, and has affirmed the ratings of MARC-1ID/AAAID on the existing RM4.5 billion Islamic Medium Term Note (IMTN) Programme and RM500.0 million Islamic Commercial Paper/Islamic Medium Term Note (ICP/IMTN) Programme with a combined limit of RM4.5 billion. The rating outlook on the Perpetual Sukuk is negative, consistent with the revised outlook on the ICP/IMTN to negative from stable. The two-notch rating differential between the Perpetual Sukuk and IMTN is in line with MARC's notching principles on hybrid securities.
The negative outlook revision factors in the slower-than-expected pace of measures initiated thus far to address the substantial increase in group borrowings following the debt-funded acquisition of New Britain Palm Oil Limited (NBPOL) for RM6.0 billion in March 2015. Some of the group's earlier plans to pare down its debt have been postponed owing to weak market conditions. Additionally, the group's key business segments have continued to face a tough operating environment, leading to weaker earnings and cash flow generation that have put pressure on its credit metrics. These factors notwithstanding, the affirmed ratings reflect Sime Darby's geographical diversity of and significant market position in the oil palm plantation, property, motors and industrial segments. The group's strong financial flexibility which also stems from its status as a government-linked corporation supports the rating affirmation.
MARC notes that Sime Darby's plan to issue the Perpetual Sukuk is a major first step to improve the group's liquidity profile; initial proceeds from the issuance would be utilised to meet upcoming financial obligations. As the Perpetual Sukuk receives 50% equity credit in line with MARC's approach in evaluating hybrid securities, group debt-to-equity would improve to 0.53 times from 0.60 times, assuming the full drawdown of RM3.0 billion is utilised for debt repayment. MARC understands that the group is working on other initiatives to strengthen its balance sheet, including equity placements, monetising non-core assets and divestments. Nonetheless, MARC remains concerned on the implementation timeline given the prevailing challenging conditions.
The low crude palm oil (CPO) price environment has continued to weigh on the Plantation division's performance; the average CPO selling price was lower at RM2,193/MT for the financial year ended June 30, 2015 (FY2015) (FY2014: RM2,451/MT). Despite an increase in fresh fruit bunch production, owing to NBPOL's contribution from its 82,068 hectares (ha) of cultivated oil palm since its acquisition in March 2015, the Plantation division's revenue and profit before interest and tax (PBIT) declined by 6.3% y-o-y and 38.8% y-o-y to RM10,268.6 million and RM1,148.1 million in FY2015.
The group's Industrial division continues to be affected by lower heavy equipment sales due mainly to the weak Australian mining sector. For FY2015, the division's revenue and PBIT declined by 9.5% y-o-y and 48.5% y-o-y to RM10,558.2 million and RM521.2 million respectively. Its Motors division's performance was hampered by margin pressures despite recording higher sales; PBIT declined by 25.4% y-o-y to RM473.6 million against the 5.1% y-o-y revenue growth to RM18,646.3 million in FY2015. The group's China motor markets have also been affected by stringent regulations aimed at reducing road congestion and curbing luxury spending. The improved sales were, however, supported by its Vietnam, Australia and New Zealand markets.
The weaker performance of its Plantation, Industrial and Motors divisions were moderated by Sime Darby's Property division's improved performance; better sales at its new launches in existing township developments Elmina and Bandar Ainsdale as well as disposal of land parcels and a joint-venture project supported the overall performance during FY2015. The Property division recorded a revenue increase of 23.8% y-o-y to RM3,455.0 million and PBIT increase of 48.3% y-o-y to RM889.4 million. MARC notes that the sizeable contracted sales (unbilled sales) of RM1.3 billion as at end-June 2015 will provide earnings visibility over the intermediate term. Additionally, the group's diverse property mix that includes township developments, sizeable land bank, property investments and foreign property venture should provide a buffer against headwinds in the domestic property sector.
For FY2015, consolidated group revenue declined marginally to RM43.7 billion but PBIT declined by 28.9% y-o-y to RM3.3 billion. The group incurred higher finance costs due to the increase in borrowings to RM18.1 billion as at end-FY2015. This rose to RM19.7 billion as at end-1QFY2016, leading to gross and net DE ratios of 0.60 times and 0.49 times respectively. MARC notes that approximately RM10 billion of the group's borrowings is denominated in US dollars (USD2.3 billion); however, its cash flow obligations are naturally hedged against its US dollar receivables. The group has a strong liquidity position with cash balance of about RM4.2 billion as at end-FY2015 in addition to significant unutilised credit lines.
At the holding company level, Sime Darby's revenue decreased to RM1.3 billion in FY2015 (FY2014: RM2.0 billion) largely due to lower dividends received from the Plantation and Industrial divisions. The Plantation division is expected to remain the main dividend contributor, having accounted for 47.8% of total dividend income in FY2015 (FY2014: 49.1%). As at end-June 2015, holding company debt stood at a lower RM1.9 billion (FY2014: RM2.6 billion), which improved the holding company's leverage ratio to 0.14 times (FY2014: 0.20 times). The next scheduled repayment of RM1.0 billion under the rated IMTN programme is due in November 2016, which could be refinanced upon maturity.
Downward rating pressure would increase should the performance of the group's key divisions further weaken its consolidated credit profile. Any revision in the rating outlook to stable would depend on the pace and scale of deleveraging efforts that would restore the group's financial metrics to its historic level, including the group gearing level between 0.30 times and 0.40 times.
-Ends-
Contacts: Saifuruddin Othman +603-2082 2245 / saifuruddin@marc.com.my, Cheah Wan Kin +603-2082 2232 / wankin@marc.com.my, Taufiq Kamal, +603-2082 2251 / taufiq@marc.com.my.
© Press Release 2016
