MARC REVISES RATING OUTLOOK ON SIME DARBY BERHAD’S ISLAMIC DEBT FACILITIES TO STABLE

Jun 17, 2011 -

MARC has revised its outlook on Sime Darby Berhad's (Sime) MARC-1ID /AAAID debt ratings to stable from negative. The outlook revision affects the following facilities of Sime:

1) RM4.5 billion Islamic Medium Term Note (IMTN) Programme (RM2.0 billion outstanding) and RM500 million Islamic Commercial Paper (ICP) Programme (RM500 million outstanding) with combined limit of RM4.5 billion; and

2) RM150 million Underwritten Murabahah Commercial Papers Facility.

The outlook revision reflects abating downside risks to Sime's consolidated credit profile from projects of its Energy & Utilities (E&U) division. The E&U division's EBIT of RM219.5 million for the nine months to March 31, 2011 (9MFY2011) marks a turnaround from the RM1,019.3 million loss for the prior year corresponding period.

The progress made on E&U division's problem projects since the rating agency's last rating action in October 2010 has alleviated MARC's major concerns about project execution risk and the potential for additional losses. MARC notes a RM98.5 million write-back of provisions for E&U division's Maersk Oil Qatar project in the third quarter of FY2011 following project close-out. Meanwhile, its Qatar Petroleum project (in respect of which a RM200 million provision has been made in 3QFY2010) has moved into the close-out phase. The Bakun dam project in which Sime is the lead consortium member with a 35.7% interest is scheduled for handover end-2011 while completion of India-based ONGC project is targeted by June 2012. Provisions of RM450 million made for the Bakun dam project and RM227 million for the ONGC project are expected to provide adequate buffer for actual cost overruns.

Sime recently announced that it would be exiting from oilfield services by divesting Sime Darby Engineering Sdn Bhd's (SDE) oil and gas assets for a provisional cash consideration of RM695 million. Non-binding memoranda of understanding (MOUs) for the disposals of its Teluk Ramunia and Pasir Gudang fabrication yards have been signed with national oil company Petroliam Nasional Berhad (Petronas) and Malaysia Marine and Heavy Engineering Holdings Berhad (MHB) respectively, for this purpose. MARC views the divestments as positive for Sime's consolidated credit profile in light of the operational challenges of its oilfield services business and huge prior year losses. The disposal of the oil and gas assets will allow Sime to focus on its core plantation, property, automotive and industrial businesses, and show improvement in its consolidated profitability. MARC understands that Sime would still have to complete its outstanding contractual obligations notwithstanding the divestments.

For the nine to March 31, 2011, Sime reported a doubling of consolidated pre-tax profit to RM3.4 billion (9MFY2010: RM1.7 billion) on consolidated revenue of RM29.7 billion (9MFY2010: RM23.7 billion). The group saw higher contributions from its plantation, industrial and motor divisions which reported increases of 18%, 30% and 90% respectively in EBIT. Its EBITDA interest coverage also strengthened to 17.4 times (9MFY2010: 14.3 times). Sime's consolidated liquidity remains strong with cash and cash equivalents of RM4.1 billion (FY2010: RM4.4 billion) as of March 31, 2011 against short-term borrowings of RM3.2 billion (FY2010: RM3.3 billion).

In light of the above developments, MARC considers Sime's credit metrics to be sufficiently restored and commensurate with its long-term rating of AAA. Further factored into the stable outlook is Sime's strong commitment to preserve its current ratings.

Contacts:

Benjamin Yab, 03-2082 2270/ benjaminyab@marc.com.my;
Rajan Paramesran, 03-2082 2233/ rajan@marc.com.my.