Sime Darby Bhd - 2009

MARC has assigned the ratings of AAAID and MARC-1ID / AAAID to Sime Darby Berhad’s (Sime Darby) new Islamic debt programmes comprising RM4.5 billion Islamic Medium Term Notes (IMTN) and RM500 million Islamic Commercial Papers/Islamic Medium Term Notes (ICP/IMTN) respectively with a combined limit of RM4.5 billion. The outlook on the ratings is stable. Additionally, MARC has affirmed its MARC-1ID / AAAID and MARC-1ID ratings on the existing RM1.5 billion Murabahah Commercial Papers/Murabahah Medium Term Notes programme (MCP/MMTN programme) and RM150 million Murabahah Commercial Papers facility (MCP) respectively. The stable outlook on the ratings is maintained. 

The rating actions incorporate the conglomerate’s reduced integration risk after almost two years of operation since its large-scale merger in November 2007, the current sizeable scale of its oil palm plantation and property development operations, its strong market positions in its automotive and industrial equipment business lines and sound financial profile. Although its unaudited financial results for the financial year ended June 30, 2009 (FY2009) was down substantially from FY2008, the ratings reflect MARC’s expectations that Sime Darby’s consolidated balance sheet and cash flow coverage will become progressively stronger as the operating climate in its core business lines improves over the intermediate term. The ratings also reflect Sime Darby’s favourable financial flexibility and the strong liquidity it has consistently maintained relative to leverage.

The proceeds from the new issuance will potentially be partly utilised for the refinancing of the outstanding RM1.0 billion MCP/MMTN programme and RM150 million MCP. The balance of the proceeds is expected to be utilised for group’s working capital requirements and general corporate purposes, future investments and/or capital expenditure.

Sime Darby is the world’s largest oil palm plantation group and Malaysia’s largest property developer by landbank. Sime Darby has maintained strong niche-market leading positions in the industrial, motor, energy and utilities sectors. It is the third largest automobile dealer group globally for German automaker BMW, and one of the world’s largest dealers for heavy equipment maker US-based Caterpillar Inc. The geographical diversity of Sime Darby’s operations and the range of customers and industries continue to mitigate its exposure to downturns in specific sectors. Nevertheless, the group’s financial performance has been impacted by the current economic crisis.

For FY2009, the group’s revenue and pre-tax profit dropped by 9.0% and 41.0% to RM31.0 billion (FY2008: RM34.0 billion) and RM3.1 billion (FY2008: RM5.2 billion) respectively. The lower result was mainly due to weaker performance of the plantation division as a result of lower average crude palm oil (CPO) prices. However, despite lower CPO and palm kernel prices, Sime Darby’s net profit after tax and minority interests of RM2.3 billion for FY2009 exceeded the group’s revised Key Performance Indicator (KPI) of RM1.9 billion by 20%, from the earlier announced KPI of RM3.7 billion, mainly due to improvements in the industrial, property and motor divisions amid lower global demand.  The plantation division contributed more than half of the group’s profit before interest and tax (PBIT), as compared to its FY2008’s contribution of 70.4% attributed to the lower CPO prices, apart from lower production as a result of lower fresh fruit bunches (FFB) yield. The industrial and property divisions were the second and third largest contributors of PBIT respectively in FY2009.

The group’s capital structure continues to be characterised by a low level of net debt, with a consolidated debt-to-equity ratio (DE) of 0.25 times as of June 30, 2009. With full drawdown of the proposed combined limit of RM4.5 billion Islamic debt programmes and retirement of its outstanding RM1.0 billion MCP/MMTN Programme and RM150 million MCP, the group’s DE ratio will increase to 0.41 times on a pro forma basis. However, the group intends to drawdown the Islamic programme progressively. While its capital spending requirements of RM7.0 billion over the next two to three years are expected to exceed annual operating cash flow in FY2010 and FY2011, Sime Darby would need to maintain its debt structure and liquidity within the agency’s tolerance range in order to retain the current ratings. The group would need to keep its DE ratio at below 0.50 times and to maintain a satisfactory liquidity cushion in the form of cash and cash equivalents to retain the current ratings.

Sime Darby’s cash and cash equivalents had risen to RM3.3 billion as of June 30, 2009 against near-term debt maturities and short-term borrowings of RM3.6 billion (including the outstanding RM1.0 billion MCP/MMTN Programme and RM150.0 million MCP) which Sime Darby plans to refinance with proceeds from the issuance of notes under the proposed Islamic debt programme. MARC believes that the proposed facilities will augment Sime Darby’s financial flexibility by allowing it to proactively its debt maturities.

The stable ratings outlook incorporate some weakening of Sime Darby’s near-term credit measures from historical levels given the lack of free cash flow generation expected. However, if business conditions and operating performance prove to be significantly below MARC’s expectations, this could put pressure on the current ratings or outlook. One of the main challenges Sime Darby will foreseeably face is to receive strong dividends flow from its subsidiaries amid slower growth prospects.

Strengths

Challenges/Risks