Moody's affirms Sime Darby's ratings at A3, outlook revised to negative

Moody's affirms Sime Darby's ratings at A3, outlook revised to negative. - AFP file pic

KUALA LUMPUR: Moody's Investors Service has affirmed Sime Darby Bhd's A3 issuer rating and A3 senior unsecured debt rating on the Sukuk issued by Sime Darby Global Bhd, a unit of Sime Darby.

It said on Friday Sime Darby Global's (P)A3 senior unsecured MTN programme rating has also been affirmed. 

“The outlook for both ratings is negative,” it said, pointing out that despite the broad spread of its business interests, Sime Darby has been impacted across the board.

Moody’s said Sime Darby was affected by the slower rate of growth in China and most Asia-Pacific economies combined with lower commodity prices and a weaker domestic currency. 

This has seen leverage surge to over four times for the year ended June 30, 2015 from 1.5 times for FY2012.

"The A3 rating is not sustainable at four times leverage, but the company, during last week's results briefing, indicated that over the next six to nine months gearing -- as measured by debt/equity - could fall to around 35%-40% from 58% currently. 

“On that basis, and given the company's long track record, the rating action has been limited to a negative outlook at this time," said Moody's. 

However, the ratings agency cautioned that failure to deliver on the de-gearing within six months could lead to further erosion in Sime Darby's ratings," said Moody's vice president and senior credit officer Alan Greene.

Sime Darby is the world's largest palm oil producer and the plantation division remains profitable despite palm oil pricing hitting a six-year low at less than RM2,000 a tonne.  

Sime Darby's credit profile also benefits from the diversity afforded by it its Motors, Property and Industrial divisions which hold good market positions. 

However, Motors and particularly Industrial have struggled in the current  environment of slowing regional economic growth and lower coal prices, and supporting the inventory and rental equipment needs of these divisions added to the pressure on the Group's cash flow in FY2015.

Sime Darby's palm oil output, measured on a 12 months basis, was on a declining trend between September 2013 and March 2015, largely due to unfavourable weather conditions. 

However, the substantially debt-funded acquisition of New Britain Palm Oil Limited (NBPOL) in early March boosted Sime Darby's plantation area by 15% and coupled with better operating conditions in Malaysia, Sime Darby's output of fresh fruit bunches for the three months ended July 2015 was 22% higher than for the three months ended April 2015.

In FY2015, Sime Darby achieved EBITDA of RM4.5bil compared to RM5.5bil in FY2014 reflecting declining CPO prices, and a sharp fall in Industrial's contribution. 

During this time, reported gross debt climbed to RM18.2bil from RM11.3bil even as free cash balances declined by RM700mil.

The rise in debt was largely driven by the RM6.9bil acquisition of NBPOL and its debt, where the price paid was full with respect to current CPO prices and the ringgit/pound sterling exchange rate.

"While management has pared back investment, sold several non-core assets and relied heavily on its Property business to contribute cash and profits, based on the outlook for Motors and Industrial, and given current CPO prices, EBITDA or FFO are insufficient on their own to reduce leverage in a timely manner," adds Greene, Moody's Lead Analyst for Sime Darby.

 Sime Darby has mooted larger disposals but market conditions for an IPO of Motors or even a partial sale of its Indonesian plantations are not considered by management to be supportive.

The group has uncommitted facilities and proven access to finance in Malaysia, but liquidity is nevertheless a concern, with short-term net debt of RM2.7bil compared to our estimated FFO in FY2016 of MYR3.2 billion based on an average CPO price of RM2,240/tonne. 

Moody's forecast anticipates some liquidity and profit support from the on-going sale of assets, but the easier disposals have probably been made. 

However,  Sime Darby retains a significant landbank in Malaysia close to conurbations with very high potential development value, as well as its 40% stake in the popular Battersea power station re-development project in London.
 
Sime Darby's largest single shareholder is Permodalan Nasional Bhd (PNB, unrated) a state-owned asset manager whose 52% shareholding in Sime Darby is largely in accounts representing pension investments and unit trust sales to the public in Malaysia. 

Moody's notes that PNB partook in the scrip dividend scheme offered in January 2015.

"While Sime Darby is widely viewed as a Government Linked Company, Moody's regards Sime Darby as a relatively independent business, albeit with supportive shareholder. No formal uplift is incorporated into the current rating," notes Greene.

The outlook is negative and could crystallise into a downgrade if substantial debt reduction fails to materialise in the next six months such that adjusted debt/EBITDA remains above 2.5 times.

The rating is unlikely to be upgraded or the outlook restored to stable even with a large reduction in debt levels given the current environment for its key businesses, although overt and substantial government support would be viewed favourably. 

Nevertheless, higher CPO prices resulting in much greater cash generation coupled with an improved debt maturity profile could support a stable outlook.

The principal methodology used in these ratings was Business and Consumer Service Industry published in December 2014.