MARC ISSUES RATING UPDATE ON SIME DARBY BERHAD’S DEBT RATINGS

MARC is issuing this update on Sime Darby Berhad (Sime Darby) following the group’s recent asset disposals and share placement exercise, in line with its announced deleveraging exercise. The group has made steady progress in utilising the proceeds from the exercise to pare down its borrowings which rose sharply following the acquisition of New Britain Palm Oil Limited for RM6.0 billion in March 2015. The acquisition contributed to a substantial increase in consolidated borrowings to RM18.1 billion as at end-June 2015, pushing its leverage to 0.57 times. 

MARC notes that Sime Darby has disposed property assets in Malaysia and Singapore which generated RM816.0 million in net gains at end-June 2016 (FY2016). The group has also completed the sale of another property in Singapore and disposed a 10% equity interest in Eastern & Oriental Berhad during 1QFY2017; these disposals are expected to provide gross proceeds of about RM570 million. In addition, Sime Darby has successfully completed its share placement exercise, which generated proceeds of RM2.4 billion, of which RM1.2 billion will be utilised to reduce its borrowings. As a result of these measures, MARC estimates Sime Darby group’s borrowings to decline to about RM15.2 billion, which would reduce its consolidated debt-to-equity to about 0.40 times. On the cards is the disposal of industrial properties in Australia worth about RM1.1 billion to a real estate investment trust (REIT) based in Singapore, which would further add to its liquidity.

MARC also views that the recovery of crude palm oil (CPO) prices to around RM2,600/MT levels in recent months, as compared to Sime Darby’s plantation division’s average of RM2,242/MT between July 2015 and June 2016, would improve the division’s earnings. However, lower production volumes in Malaysia and Indonesia as a result of dry weather conditions could moderate cash flow generation. Notwithstanding the improved prospects of Sime Darby’s plantation division, the rating agency remains concerned on the continued subdued performance of its other divisions, in particular the property and industrial divisions.

MARC is currently in the midst of conducting its annual rating review on Sime Darby which is expected to be completed by end-4Q2016. As part of the review, MARC will assess Sime Darby’s progress in restoring its financial metrics to its previous level. Sime Darby’s RM4.5 billion ICP/IMTN and Perpetual Sukuk are currently rated MARC-1_ID/AAA_ID  and AA_IS respectively with a negative outlook.

Contacts: Saifuruddin Othman +603-2082 2245 / saifuruddin@marc.com.my, Taufiq Kamal, +603-2082 2251 / taufiq@marc.com.my.

October 20, 2016