CREDIT ANALYSIS REPORT

SIME DARBY PLANTATION BERHAD - 2022

Report ID 6053890046920 Popularity 130 views 15 downloads 
Report Date Oct 2022 Product  
Company / Issuer Sime Darby Plantation Berhad Sector Plantations
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Rationale
Rating action      
MARC Ratings has affirmed Sime Darby Plantation Berhad’s (SD Plantation) corporate credit rating at AAA. Concurrently, the rating agency also affirmed its AAIS rating on SD Plantation’s Perpetual Subordinated Sukuk Programme (Perpetual Sukuk) of up to RM3.0 billion. Both ratings carry a stable outlook.

Rationale     
The affirmed corporate credit rating reflects SD Plantation’s strong cash flow generating ability from its geographically sizeable and integrated oil palm operations, underpinned by its longstanding operating track record in the oil palm plantation industry and its favourable tree maturity profile. The affirmation also considers its improving leverage position that has eased strain on the group balance sheet. The rating benefits from a one-notch uplift on implicit support from parent Permodalan Nasional Berhad (PNB), a government-linked investment company.     

With total planted area of 578,229 ha as at end-June 2022, SD Plantation is the world’s largest oil palm plantation company by planted area. Malaysia and Indonesia accounted for 84% of total planted area, with the remaining 16% in Papua New Guinea/Solomon Islands (PNG/SI). The rating agency notes that given 27% of its trees are of prime ages (aged nine to 18 years) and 43% are immature and young matured trees (aged below eight years), its tree maturity profile will continue to be supportive of the growth of fresh fruit bunch (FFB) production. SD Plantation’s replanting strategy of about 4% p.a. of its total plantation area, mainly in Malaysia and Indonesia, augurs well for continuity in palm oil production.     

For 1H2022, the tight supply of vegetable oil globally, mainly due to the Russia-Ukraine conflict and Indonesia’s export ban on palm oil, led to elevated crude palm oil (CPO) price although this has since tapered on increase in palm oil inventories. CPO price reached a high of RM8,077 at end-March 2022 and receded to RM4,037 at end-August 2022. The volatility of CPO price and the persistent labour issues in its Malaysian operations that have impacted operating efficiencies in recent years remain moderating factors to the rating.     
SD Plantation realised an average CPO price of RM4,868/MT for 1H2022 (1H2021: RM3,422/MT), which led to an increase in revenue y-o-y to RM10 billion and pre-tax profit to RM2.2 billion (1H2021: RM8.1 billion;  RM1.7  billion). Notwithstanding this, labour shortages for  its  Malaysian operations  have  led to extended harvesting intervals that have impacted overall FFB production, resulting in a 15% y-o-y dip to 4.0 million MT in 1H2022 (1H2021: 4.7 million MT). To reduce its reliance on manual labour, the group has increased automation and mechanisation in key upstream processes. For this purpose, the group also has planned capex of RM200 million to 300 million p.a. Its other key capex is for the replanting exercise which is projected to cost about RM930 million p.a. and will be funded internally.     

Cash flow from operations (CFO) declined slightly to RM1.1 billion (1H2021: RM1.3 billion) due to higher input cost. Group liquidity position remains strong, with unrestricted cash balance of RM734 million as at end-June 2022 that is sufficient to meet its short-term term loan obligations. Group adjusted borrowings of RM8.0 billion as at end-June 2022 (end-2021: RM7.4 billion) translated into a gross debt-to-equity (DE) ratio of 0.45x (net DE ratio: 0.41x), which is within our forecast. Should the group’s existing debt maturity profile and borrowings remain at the current level, gross DE ratio is expected to reduce further to 0.4x by end-2022. We also understand that the ongoing deleveraging plan that involves disposals of non-core assets that would generate up to RM3.1 billion in sales proceeds is expected to reduce the gross DE ratio to about 0.3x by end-2023. CFO interest coverage remains strong of 16.6x.     

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 and divestments.     

Rating trajectory     

Downside scenario     
The rating and/or outlook could come under pressure if the financial performance deteriorates substantially and/or if borrowings increase such that leverage position weakens.     

 
Key strengths     
  • World’s largest CSPO palm oil producer
  • Vertically integrated operations with significant geographical presence 
  • Strong financial flexibility
Key risks
  • CPO price volatility
  • Thin margins for downstream operations
  • Compliance with ESG standards
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