Sime Darby Bhd - 2013

MARC has affirmed its MARC-1ID/AAAID ratings on Sime Darby Berhad’s (Sime Darby) RM4.5 billion Islamic Medium Term Notes Programme (IMTN Programme) and RM500 million Islamic Commercial Papers (ICP) with a combined limit of RM4.5 billion (ICP/IMTN Programme). The outlook of the ratings is stable.

The affirmed ratings incorporate Sime Darby group’s well-diversified business profile that has continued to balance the weaker earnings trend in its key businesses such as plantation, industrial and motors with improved performance in others segments. The prevailing weak crude palm oil (CPO) prices, despite some recovery in 1Q2014, the impact of the sharp slowdown in Australia mining sector after a prolonged boom and the challenging economic conditions in China have weighed on the group’s recent performance. This weakness has been partly offset by the stronger performance of its property division and gains from divestments. The ratings also factor the group’s healthy liquidity profile, moderated by its increased leveraged position, in part due to a partial drawdown on the US$1.5 billion multi-currency sukuk programme that was set up in January 2013, although leverage remains low on a net debt basis.

Sime Darby’s plantation division continues to be the largest contributor to group earnings despite weakening performance in recent years: for half-year ended December 31, 2013 (1HFY2014), operating profit declined sharply by 36.2% year-on-year (y-o-y) to about RM762.1 million (1HFY2013: RM1.2 billion) on the back of a lower average crude palm oil (CPO) price of RM2,377/MT in 1HFY2014 (1HFY2013: RM2,432/MT; FY2012:RM2,925/MT). In addition, the group’s Indonesian plantations had suffered from tree stress, leading to a 24% y-o-y decline in fresh fruit bunch (FFB) production in 1HFY2014. MARC expects the division’s financial performance to improve given the recovery in CPO price, albeit range bound between RM2,500/MT and RM2,600/MT, and fairly healthy maturity profile of its cultivated plantation land of about 525,325 ha. Sime Darby’s operations in Liberia, where about 10,000 ha of oil palm are under cultivation as at end-1HFY2014, are expected to enter the production stage in 2015. 

The group’s industrial division was affected by lower sales of heavy equipment and support services to the Australian mining sector, resulting in an 11.8% y-o-y decline in operating profit to RM588.7 million in 1HFY2014 (1HFY2013: RM667.4 million). The ongoing slowdown in the mining sector will continue to weigh on heavy equipment sales in the near term. The motor division was negatively impacted by the tough operating environment in key markets which caused operating profit to decline 20.2% y-o-y to RM260.0 million (1HFY2013: RM325.9 million). MARC notes that the performance of the group’s energy and utilities division has remained flat, registering RM109.3 million in 1HFY2014 compared to the corresponding period last year; the RM130.3 million recorded in 1HFY2013 was due to gains on disposal of a jointly controlled entity for RM7.0 million and write-backs. MARC understands that the group is expected to dispose its Port Dickson power plant in fiscal 2014 for a cash consideration of RM300.0 million to further streamline its business.

The weaker performance from the group’s main contributors has been slightly offset by the property division which recorded operating profit increase of 5.4% to RM137.7 million in 1HFY2014 (1HFY2013:  RM130.7 million) on higher sales and percentage of completion from the Elmina East and Bandar Bukit Raja developments. MARC expects the performance of the property division to come under some pressure following the implementation of restrictive housing measures, although the group’s diverse offerings may provide some buffer against any sharp slowdown. Nonetheless, the division’s unbilled sales of RM1.3 billion as at end-FY2013 is expected to provide near-term earnings visibility.

For 1HFY2014, Sime Darby registered lower consolidated earnings of RM1.4 billion on the back of revenue of RM21.6 billion compared to the previous corresponding period (1HFY2013: RM1.8 billion; RM23.0 billion). The weak trend continued from FY2013, when revenue and earnings fell by 0.9% and 11.8% y-o-y to RM46.8 billion and RM3.8 billion (FY2012: RM47.3 billion; RM4.3 billion). Profitability in FY2013 was supported by a gain of RM340.6 million following the disposal of the group’s interest in its healthcare operations to a joint venture. Group borrowings rose to about RM10.8 billion in 1HFY2014 (FY2013: RM10.3 billion) following the drawdown of US$800 million under its US$1.5 billion multi-currency sukuk programme, the proceeds of which were utilised to refinance some borrowings and for capital expenditure. At end-1HFY2014, group debt-to-equity stood at 0.40 times; the consolidated liquidity position as reflected by cash and cash equivalent of about RM4.2 billion as at end-1HFY2014 provides a strong buffer against short-term borrowings of RM2.8 billion. 

At the holding company level, the plantation division remains the main dividend contributor, accounting for 65.3% of RM1.7 billion dividends received in FY2013 (FY2012: RM2.7 billion). Aside from the steady contributions from the property and industrial division, the holding company also received dividends of RM100.0 million from the motor division for the first time since the merger in 2007. Borrowings at the holding company level declined to RM2.9 billion as at end-FY2013 (FY2012: RM3.4 billion), translating into a lower DE ratio of 0.23 times. MARC notes that to provide further headroom for financial flexibility, the group has initiated a dividend reinvestment plan to conserve cash. The next scheduled repayment of RM700 million under the rated programme is due in November 2014.

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

Strengths

• Well-diversified business profile across segments and geographies;
• Strong market position in palm oil; and
• Strong liquidity position.

Challenges/Risks