KUALA LUMPUR: Moody's Investors Service has affirmed the Baa1 issuer rating of Sime Darby Plantation Bhd
(SDP) as it expects the company to maintain its credit profile by reducing its debts from its asset sales.
The international ratings agency had on Wednesday had affirmed the (P)Baa1 rating on the US$1.5bil senior unsecured medium-term note programme of its unit Sime Darby Global Bhd and the Baa1 senior unsecured debt rating on the sukuk issued by Sime Darby Global Bhd.
Moody’s also maintained the outlook of SDP, which is the largest palm oil producer globally by planted area, at stable.
"While weak palm oil prices have reduced SDP's earnings, we expect the company will maintain its credit profile through substantial debt reduction using the proceeds from its planned RM1bil asset sales this year," says Maisam Hasnain, a Moody's analyst.
SDP derives the majority of its earnings from its upstream operations of oil palm cultivation and crude palm oil (CPO) production. The decline in palm oil prices has resulted in SDP's leverage -- as measured by adjusted debt/EBITDA -- increasing to around four times as of March 2019 from around 2.5 times in June 2018, breaching its rating downward trigger of 3.5 times.
However, based on Moody's medium term price assumptions for CPO of RM2,100 per tone, and the deployment of proceeds from planned land sales and asset disposals to debt reduction, it expects SDP's adjusted leverage will decline to around 3.3 times by December 2019.
"Given SDP's elevated leverage, any delays in executing its asset monetisation plans or the use of proceeds for purposes other than debt reduction would likely result in a negative rating action," adds Hasnain, also Moody's lead analyst for SDP.
SDP's Baa1 ratings reflect (1) its position as the largest palm oil producer globally by planted area, (2) Moody's expectation that SDP will maintain efficient and profitable operations that span across the palm oil value chain, and (3) SDP maintains prudent financial policies, including a conservative approach to further investments.
“To reduce earnings volatility, SDP plans to increase the earnings contribution from its downstream business to 15%-20% of consolidated profit before earnings and tax (PBIT) in 2023, from 11% for the fiscal year ended June 2018.
“Increased earnings diversity through organic means will be credit positive, but any large debt-funded acquisitions to achieve this target could lead to negative ratings pressure.
“Moody's expects SDP's liquidity profile will remain weak, as its cash sources will be insufficient to meet uses including scheduled debt maturities, capital spending and dividends over the next 12-15 months.
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