JAN 13: Fitch Ratings has affirmed Malaysia-based conglomerate Sime Darby Berhad
's (Sime Darby) Long-Term Foreign and Local Currency Issuer Default Ratings (IDR), and senior unsecured rating at 'A'. The Outlook is Stable. Fitch has also affirmed the rating on SIME's USD1.50bn sukuk issue at 'A'.
The ratings reflect Sime Darby's scale and business diversity, its strong market position in the crude palm oil (CPO) business, consistent generation of positive fund flows from operations and moderate financial leverage. Although Sime Darby's financial performance was weaker in its fiscal 1Q ended 30 September 2013, Fitch expects it to maintain its performance at FY13 levels because of stronger CPO prices. The ratings are constrained by the cyclicality of Sime Darby's businesses.
KEY RATING DRIVERS
Diversified Business Profile: Sime Darby's ratings also reflect its diversified profile, both in terms of businesses and geographies. Plantations (40% of FY13 operating profit), industrial (26%), motors (14%), property (10%) and energy and utilities (4%) are its key businesses. Malaysia (30% of FY13 revenues), Australasia (26%), China (20%), Singapore (10%) and Indonesia (5%) are the major geographies that it operates in. Sime Darby is the world's largest CPO company by planted palm hectarage (525,325 hectares in FY13) and fresh fruit bunch (FFB) production (10.01 million tonnes). While some of its businesses exhibit higher volatility and cyclicality compared with the plantation business, each business enjoys a solid market position supported by a strong footprint in its respective markets.
Sime Darby is continuously assessing and rebalancing its portfolio mix, including up-scaling the value of its landbank and increasing facilities and capacity for its industrial division, motors, utilities and healthcare businesses. Nonetheless, Fitch expects that the plantation business will continue to be the dominant cash flow contributor over the medium term.
Weak 1QFY14 Performance: Sime Darby's 1QFY14 operating EBITDA margin declined to 10.14% from 14.02% in 1QFY13 and 12.57% in FY13. This was primarily due to the weaker CPO price realized, a 16% drop in fresh fruit bunch (FFB) production to 2.47m tonnes, driven by a delay in peak cropping, primarily in Kalimantan, and biological tree stress following a bumper harvest year. Secondary factors were the weak performance of the motors division, where all markets (Singapore, Thailand and China) except Malaysia reported lower sales due to weak market sentiment and regulatory changes in Singapore. The industrial division also came under some pressure due to the slowdown in the Australian mining sector triggered by lower commodity prices.
Increasing CPO Price: Fitch estimates that Sime Darby should be able to maintain its financial performance at FY13 levels, aided by the rising CPO price and declining trend in CPO closing stocks, which fell to 36 days in December 2013 from 51 days in December 2012. CPO prices have improved by 8.5% to USD897.33 per tonne during the quarter ended 31 December 2013 from USD827 during the quarter ended 30 September 2013 on account of lower inventory levels and demand holding up. Fitch expects the increase in CPO content in bio-diesel from 5% to 7% in Malaysia and from 7.5% to 10% in Indonesia with effect from 1 January 2014 to contribute to stable demand for CPO in 2014.
RATINGS SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- A downgrade in Malaysia's Country Ceiling of 'A', which would result in a corresponding downgrade in Sime Darby's Long-Term Foreign-Currency IDR, which is currently at the same level as the Malaysian Country Ceiling
- An increase in the role of the Malaysian sovereign or related entities in Sime Darby's decision making process will result in the Long-Term Foreign- and Local-Currency IDRs being downgraded and placed on a par with the sovereign rating, which is currently 'A-'
- A sustained increase in financial leverage (adjusted net debt/ FFO) to over 1.75x (FY13: 1.61x)
Positive: No positive rating action is expected in the medium term due to the cyclical nature of SIME's key businesses.
- Reuters
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