MARC AFFIRMS ITS MARC-1ID/AAAID RATINGS ON SIME DARBY BERHAD’S ICP/IMTN PROGRAMME

May 22, 2013 -

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 million Islamic Commercial Papers (ICP) with a combined limit of RM4.5 billion (ICP/IMTN Programme). The outlook of the ratings is stable. The rating of MARC-1ID on the RM150 million Underwritten Murabahah Commercial Papers Facility has been withdrawn upon the expiry and cancellation of the facility.

The affirmed ratings reflect the group’s well-diversified business profile across businesses and geographies; the steady operating track record of its core business segments of plantation, industrial, motors and property; and strong financial flexibility. Sime Darby’s performance, however, remains susceptible to commodity price volatility, in particular crude palm oil (CPO) prices, and industry cyclicality that could be further compounded by the challenging economic conditions in some of the major markets in which the group operates.

Sime Darby’s plantation division, which is one of the group’s six main business divisions, has remained the largest contributor to its operating profit, generating 50% of the total for the half-year ended December 31, 2012 (1HFY2013) (1HFY2012: 59%). The plantation division has over 519,000 ha of cultivated oil palm acreage and is one of the world’s largest producers of CPO, contributing 6% of the global output annually. With 61% of the total cultivated areas in the prime maturity range, MARC opines that the division’s performance will be underpinned by steady fresh fruit bunch production. Notwithstanding this, the weak CPO price trend will continue to weigh on the division’s near-term performance. For 1HFY2013, the lower average CPO price of RM2,432/MT (FY2012: RM2,925/MT; 1HFY2012: RM2,872/MT) was largely responsible for the sharp decline in operating profit to RM1,187 million (1HFY2012: RM1,849 million). MARC believes that recovery in the near-term prospects for the palm oil segment would be driven by the pace of palm oil inventory reduction and improvement in global economic conditions.  

MARC observes that the group’s industrial and motors division have somewhat compensated for the weaker performance of the plantation division. For 1HFY2013, the industrial and motors divisions recorded operating profit of RM659 million (1HFY2012: RM616 million) and RM320 million (1HFY2012: RM304 million) respectively. However, going forward, the performance of the motors division will be governed by the intense competition in the Chinese automotive market, among other factors, while the industrial division will depend on the rebound in mining activities in the Australasia region. MARC notes the weakening performance of the property division, which recorded a lower operating profit of RM110 million in 1HFY2013 (1HFY2012: RM179 million), is due to fewer launches undertaken by the division amid the moderating trend in the domestic property market. The division’s major overseas project, the Battersea power station redevelopment in London, UK, has since seen strong take-up rates for the first phase launched in January 2013. Nonetheless, the RM40 billion Battersea project, in which Sime Darby has a 40% stake, could expose the division to project execution risk, which is mitigated to a certain extent by the longstanding experience of the key project sponsors. Meanwhile, the performance of the energy and utilities division, which registered an operating profit of RM127 million in 1HFY2013, recorded lower throughput at its China ports and higher overhead costs.

On a consolidated basis, group revenue grew by 3.2% to RM23.2 billion for 1HFY2013 from the previous corresponding period, while pre-tax profit declined sharply by 25.5% to RM2.3 billion between the same periods. For FY2012, the group’s free cash flow (FCF) was negative RM773 million (FY2011: surplus of RM1.4 billion). Group borrowings have continued to increase to fund its acquisitions and capital expenditure spending; total borrowings stood at RM11.5 billion as at December 31, 2012 (end-June 2012: RM9.8 billion). As a result, the group debt-to-equity (DE) ratio rose to 0.43 times from 0.36 times. Assuming full drawdown on the US$1.5 billion multi-currency sukuk programme which was set up in January 2013, group DE would increase to 0.60 times.

At Sime Darby’s holding company level, revenue consisted solely of dividends from its subsidiaries, of which the plantation division remains the main contributor, accounting for 60% of RM2.7 billion dividends upstreamed in FY2012 (FY2011: RM2.0 billion). While the prevailing difficult operating environment of several of its divisions could hamper the quantum of dividend flow from subsidiaries in the near term, MARC expects the plantation division to continue to be the major dividend contributor. Borrowings at the holding company level increased to RM3.4 billion as at end-FY2012 (FY2011: RM3.2 billion), of which 79% or RM2.7 billion consisted of borrowings under the rated facility, but the DE ratio remained low at 0.26 times due to the 6% increase in shareholders’ funds. MARC also considers the liquidity and financial flexibility at the company level to be strong as reflected by cash and cash equivalents of RM315 million and the unutilised amount under the rated ICP/IMTN programme of RM2.0 billion against short-term borrowings of RM1.7 billion as at June 30, 2012.

The stable outlook reflects MARC’s expectations that Sime Darby’s credit metrics will remain commensurate with its current ratings.

Contacts:

Nisha Fernandez, +603-2082 2269/ nisha@marc.com.my;

Ngiam Tee Wei, +603-2082 2268/ ngiam@marc.com.my;

Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my.