CREDIT ANALYSIS REPORT

SIME DARBY PLANTATION BERHAD - 2021

Report ID 60538900405 Popularity 43 views 15 downloads 
Report Date Nov 2021 Product  
Company / Issuer Sime Darby Plantation Berhad Sector Plantations
Price (RM)
Normal: RM500.00        
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Rationale
Rating action     
MARC has affirmed Sime Darby Plantation Berhad’s (SD Plantation) corporate credit rating at AAA with a stable outlook. The rating agency has concurrently affirmed its AAIS /Stable rating on SD Plantation’s Perpetual Subordinated Sukuk Programme (Perpetual Sukuk) of up to RM3.0 billion.

Rationale     
The affirmed ratings are driven by SD Plantation’s strong cash flow generating ability from its sizeable geographically-diversified and integrated oil palm operations, and improvement in financial profile that has benefitted from strong crude palm oil (CPO) prices since 4Q2020. The rating also benefits from a one-notch uplift for implicit support from parent Permodalan Nasional Berhad (PNB), a government-linked investment company. The susceptibility of the group’s performance to CPO price movement remains the key moderating factor.

In 1H2021, SD Plantation recorded a higher average CPO price of RM3,422/MT (1H2020: RM2,475/MT) which led to a 29.1% y-o-y increase in group revenue to RM8.1 billion. Cash flow from operations (CFO) rose by 10.6% y-o-y to RM1.3 billion, providing a sharp improvement in CFO interest coverage to 19.7x (2020: 15.1x). Its adjusted borrowings rose to RM8.1 billion as at end-June 2021 from RM7.8 billion at end-2020, translating to gross and net debt-to-equity (DE) ratios of 0.51x and 0.46x. This includes the outstanding issuance under the Perpetual Sukuk of RM2.2 billion. Notwithstanding the stronger liquidity position over the last two years, we understand that the group will continue with its asset disposal programme, proceeds of which will be utilised to pare down borrowings. Over the medium term, its gross leverage position is expected to decline to about 0.46x.

SD Plantation remains the world’s largest oil palm plantation player with a total planted area of 581,472 ha as at end-June 2021, of which Malaysia and Indonesia accounted for 84.3%. The remaining 15.7% of planted area is in Papua New Guinea/Solomon Islands (PNG/SI). In terms of its tree maturity profile, about 26.6% comprises prime age trees (aged nine to 18 years) and about 42.6% comprises immature and young matured trees (below eight years). As the young trees progressively enter prime age over the next five to six years, this will support growth of fresh fruit bunch (FFB) production over the medium term.

The group is currently replanting about 5% of its total plantation area p.a. for which it expects to incur a replanting cost of about RM900 million p.a. out of a projected RM2.5 billion in capex. The capex has been funded internally and the current healthy CFO generation provides further headroom to undertake replanting activities on a larger scale.

We also note that the group has faced labour shortage issues in Malaysia due to the impact of pandemic restrictions on the recruitment of foreign workers. The impact has been mainly on harvesters, that recorded a 5% y-o-y lower FFB production in 1H2021; this was offset by a 19% y-o-y higher FFB production in Indonesia. For 1H2021, total FFB production grew by a modest 2% y-o-y to 4.6 million MT. For downstream operations undertaken by Sime Darby Oils International Limited (SDO), it recorded a 38.7% y-o-y higher revenue of RM6.8 billion in 1H2021, attributable to the higher selling price and stronger demand, particularly from the Asia Pacific region. However, operating profit margin remains thin at 3.7% for the downstream segment. 

Rating outlook     
The stable outlook reflects our expectation that SD Plantation’s debt metrics will improve over the medium term on earnings growth and debt reduction through proceeds from asset disposals. 

Rating trajectory

Downside scenario    
Downward rating pressure could occur if liquidity weakens substantially and/or borrowings increase such that leverage position deteriorates from the current level.

Key strengths
World’s largest certified CSPO palm oil producer 
Vertically integrated with sizeable and geographically-diversified planted areas 
Sizeable landbank available for further cultivation 
Strong financial flexibility

Key risks
CPO price volatility
Pressure on margins for downstream operations 


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