Sime Darby Bhd - 2007

MARC has reaffirmed the ratings of Sime Darby Berhad’s (Sime Darby) RM1,500 million Al-Murabahah Commercial Papers/ Medium Term Notes (MCP/MMTN) Programme at MARC-1ID/AAAID. The outlook of the ratings has been revised from stable to developing. The ratings reflect the strong financial condition of the Group characterised by a profitability record that is high by domestic standards which, in turn, provides excellent protection for bondholders; modest albeit, rising debt leverage; and exceptional financial flexibility. The Group’s large and well-diversified domestic and international operations have historically brought stability to its ratings. The developing outlook is underpinned by the impending merger exercise involving Sime Darby undertaken by Synergy Drive Sdn Bhd (Synergy Drive) which may result in a change in the Group’s corporate structure over the medium-term.

Founded in 1910 with plantations as its original core business, Sime Darby expanded through organic growth and acquisitions to become one of Southeast Asia’s largest conglomerates but later undertook a group wide rationalisation exercise to focus on five core businesses namely; plantations, motor vehicle, heavy equipment, property and, energy and utilities. The diversified multinational has major operations in the Asia Pacific region including Malaysia, Australia, Singapore, Hong Kong and the People’s Republic of China (PRC). The Group’s operations in Malaysia remained as the largest with revenue and pre-tax profit contribution of 31.0% and 39.9% for FY2006 and contributing on average 35.3% and 58.2% of the Group’s revenue and profit before interest and tax (PBIT) respectively over the past five fiscal years.

Of the various business segments, the Heavy Equipment and Motor Vehicle segments were the largest contributors to the Group in terms of revenue and profitability for FY2006. The Heavy Equipment division’s resilient performance reflected continued demand for products and services in the logging and oil and gas sectors and buoyant activity in the Australian mining sector. The Motor Vehicle division also saw increased volume of motor vehicle sales particularly from the sales of BMW and Mini in Greater China in FY2006.

The Group achieved a record net profit surpassing the RM1.0 billion mark in FY2006, which is a substantial increase of 40% over the previous financial year. The Group continued to record strong performances with revenue and pre-tax profit of RM20.2 billion and RM1.6 billion respectively, largely due to sustained contributions from the Energy and Utilities, and Motor Vehicle divisions; and the continued outstanding performance of its Heavy Equipment division. Additionally, its General Trading, Services & Others division turned around in FY2006 to record a PBIT at RM4.0 million.

For the nine months ended 31 March 2007 (3QFY2007), the Group posted a 3.2% increase in revenue and a 38.1% jump in PBIT to RM15.2 billion and RM1.5 billion respectively. The commendable performance for 3QFY2007 was a result of strong showing from the Plantations, Heavy Equipment, and Energy and Utilities divisions. A one-off gain of RM424.0 million for the disposal of its 29.3% stake in Jaya Holdings Ltd also contributed to the Group’s improved bottom line. Moderating the results was the lacklustre performance of the motor vehicle division in the Malaysian automotive industry and stock write downs. The Group’s Motor Vehicle division remains challenged by uncertainties in the Malaysian automotive industry including intense competition in China’s market; trade policies such as tariffs and duties imposed; and more stringent credit policies. The Property division registered a notable increase in revenue and PBIT of 21.1% and 18.4% respectively due to higher percentage of construction completion.

The Group’s cash flow protection measures continued to remain strong. In spite of the Group’s rising debt levels with the additional RM500.0 million drawdown of the MCP/MMTN in FY2006, the Group’s leverage position remained modest represented by a debt-to-equity ratio of 0.34 times in FY2006 (FY2005:0.29 times). However, the Group’s strong internal capital generation capacity and gains from the disposal of non-core assets in 3QFY2007 should moderate its leverage position further, barring an increased appetite for leverage or a more aggressive stance to return value to shareholders.