Sime Darby Bhd - 2011

MARC has affirmed Sime Darby Berhad’s (Sime Darby) debt ratings as follows:

• RM4.5 billion Islamic Medium Term Note (IMTN) Programme (RM2.0 billion outstanding) and RM500 million Islamic Commercial Paper (ICP) Programme (RM500 million outstanding) with combined limit of RM4.5 billion at AAAID / MARC-1ID; and
• RM150 million Underwritten Murabahah Commercial Papers Facility at MARC-1ID.

The outlook on the ratings is stable. The affirmed ratings incorporate the group’s well-diversified business profile across several business segments and geographies and track record of operating profitability in its core business segments of plantation, industrial and motor. At the holding company level, Sime Darby’s strong liquidity position relative to its leverage and favourable financial flexibility arising from its position as a government-linked corporation support the ratings. Notwithstanding these positive factors, business cyclicality and the commodity price volatility as well as weaker global economic conditions could weigh on the holding company’s dividend income and erode the headroom at its current rating level.

Sime Darby’s plantation, industrial and motor divisions have registered strong earnings and profit growth in recent years due to strong commodity prices, robust mining activity in Australia, and stronger vehicle sales in several of its markets, respectively. Its plantation division remains the largest contributor to group revenue and operating profit with 31.5% and 58.6% contribution respectively for financial year ended June 30, 2011 (FY2011). The plantation division’s performance was driven by an increase of 25.7% in the average CPO selling price of RM 2,906/MT as compared to RM 2,311/MT achieved in the corresponding period last year. MARC expects the plantation segment’s strong earnings and cash flow generation to be sustained over the next 12 months.

MARC notes as a longstanding distributor of Caterpillar heavy machinery, mainly in Queensland and Northern Territories in Australia, the group’s industrial division has benefited from the recent mining boom in the country, translating into a 23.2% and 40.9% year-on-year (y-o-y) increase in revenue and operating profits in FY2011. The industrial division’s acquisition of a portion of Bucyrus’ former distribution business from Caterpillar for RM1.1 billion in 4Q2011 is expected to broaden the group’s competitive footprint in the Australian heavy machinery market segment. Meanwhile, the strong performance of the group’s motor division, which had registered robust luxury car sales in Hong Kong, China and Singapore, could see moderation in coming quarters on account of slower economic growth.
 
In FY2011, the group announced its exit from the oil and gas segment (O&G) with the sale of its fabrication yards in Teluk Ramunia and Pasir Gudang for RM689.5 million. The O&G segment registered significant project cost overruns that had led to losses in the preceding year. MARC believes that the divestment would enable Sime Darby to lower the business risk profile of its energy and utilities (E&U) division. Sime Darby will complete its remaining project, the construction of process platforms for India-based Oil and Natural Gas Corporation (ONGC), scheduled for completion in 4Q2012. Supported by improved performance of its utilities and port operations in China, the E&U division turned around with an operating profit of RM245.7 million in FY2011 (FY2010: -RM687.2 million).

Following a lackluster performance in FY2011, the group’s property division posted a 46.4% increase in its segment operating performance in the first six months of FY2012 (1HFY2012) compared with the prior year corresponding period. The improved performance was driven by higher sales and the completion of a higher percentage of property development works. Sime Darby’s purchase of a 30%-stake in high-end property developer Eastern and Oriental Berhad (E&O) is viewed as largely neutral from a business risk perspective.

For FY2011, holding company’s revenue, which consists mainly of dividend income from subsidiaries, rose to about RM2.0 billion (FY2010: RM1.2 billion; FY2009: RM1.3 billion). MARC observes a high concentration of dividend income from Sime Darby’s plantation subsidiary despite the group’s business diversity. The division is expected to remain as the major dividend contributor for the near- to intermediate-term. In MARC’s opinion, Sime Darby’s liquidity is strong with cash and bank balances of RM347 million and availability of RM2.0 billion under the rated facilities against its short-term borrowings of RM1.2 billion (FY2010: RM1.8 billion). Sime Darby’s recent acquisitions of Bucyrus’ distribution assets and the equity stake in E&O have resulted in an increase in its consolidated debt-to-equity ratio, the credit impact of which is currently mitigated by the ample dividend income from its operating subsidiaries relative to its debt service requirements. However, a major acquisition at holding company level or at any of its operating subsidiaries could prompt a reassessment of its ratings.

The stable outlook reflects MARC’s expectations that Sime Darby’s credit metrics will remain in line with its current ratings.

Strengths

Challenges/Risks