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.
SDP's scheduled debt maturities include US$760mil in term loans with a bullet maturity in June 2020.
“However, SDP's refinancing risks is partially offset by its strong access to funding from domestic and international banks, particularly due to its government of Malaysia-linked shareholders -- Permodalan Nasional Bhd (PNB) and Malaysia's Employees Provident Fund,” it said.
Moody’s said the rating also considers SDP's moderate exposure to environmental,social and governance (ESG) risks as follows.
Firstly, the increasing stakeholder scrutiny around environmental and social risks associated with the palm oil sector.
To help mitigate against these risks, SDP has continued to strengthen its sustainability policies. It is the world's largest producer of certified sustainable palm oil, with around 20% of global sustainable supply.
It is also a founding member of the Roundtable of Sustainable Palm Oil (RSPO), an association of palm oil industry stakeholders that promotes the growth and use of sustainable palm oil products.
Secondly, with respect to governance, while SDP has a concentrated ownership structure, this is balanced by its listed status, a publicly stated dividend policy and our view that PNB is a supportive shareholder.
Moody's expects SDP to maintain conservative financial policies in light of weak palm oil prices, including debt reduction via asset sales.
The outlook is stable, reflecting Moody's expectation that SDP will (1) prioritise proceeds from asset sales to reduce debt; and (2) maintain profitable operations despite volatile palm oil prices.
“A ratings upgrade is unlikely over the next 12-18 months given SDP's strained credit metrics. However, positive momentum could build if SDP grows in scale, maintains prudent financial policies, and demonstrates sustained improvement in its credit metrics,” it said.
Credit metrics indicative of an upgrade include (1) cash flow from operations/debt above 30%, (2) adjusted debt/EBITDA below two times, and (3) EBITA/interest expense above six times, all on a sustained basis.
Conversely, SDP's ratings could be downgraded if (1) does not reduce its absolute debt levels, (2) deploys asset sale proceeds for shareholder distributions or acquisitions, or (3) if its earnings remain weak as a result of low palm oil prices.
Credit metrics indicative of a downgrade include (1) adjusted debt/EBITDA above 3.5 times, and (2) adjusted EBITA/interest expense below three times on a sustained basis.