MARC has affirmed its ratings of MARC-1_IS/AAA_IS and AA_IS on Sime Darby Berhad’s (Sime Darby) Islamic Commercial Paper/Islamic Medium-Term Note (ICP/IMTN) Programme with a combined limit of RM4.5 billion and Perpetual Subordinated Sukuk Programme (Perpetual Sukuk) of up to RM3.0 billion respectively. The two-notch rating differential between the Perpetual Sukuk and IMTN is in line with MARC’s notching principles on hybrid securities. The outstanding amount under the rated programmes is RM700 million under the ICP/IMTN programme and RM2.2 billion under the Perpetual Sukuk programme.

The outlook on all ratings is maintained at negative. The outlook considers the risks and uncertainties associated with Sime Darby’s recently announced plan to create three standalone entities with each separately engaged in the Plantation, Property, and Trading & Logistics sectors. Sime Darby’s credit quality currently benefits from its diversified risk profile and MARC’s current ratings accord the conglomerate significant credit for scale and a diversified business model.

Notwithstanding the announced plan, MARC notes the steady progress Sime Darby has made to date to strengthen the group’s balance sheet by paring down group borrowings from its combined RM3.9 billion proceeds from asset disposals and share placement as well as by undertaking a RM1.0 billion dividend reinvestment in 2016. As a consequence, Sime Darby has lowered its debt-to-equity ratio to 0.49 times as at the financial period ended September 30, 2016 (1QFY2017) (FY2015: 0.57 times). The group is expected to continue to reduce its borrowings in the near term through its asset monetisation exercises. MARC views the positive outcome of Sime Darby’s deleveraging efforts and strong financial flexibility that remains supported by its key government-linked shareholder, Permodalan Nasional Berhad, as factors that underpin its current ratings.

For 1QFY2017, Sime Darby’s consolidated earnings increased by 10.9% y-o-y to RM673 million, supported by disposal gains of RM197 million. With the sharp increase in CPO price since end-FY2016, the group’s earnings prospects have improved over the intermediate term, although fresh fruit bunch production may be affected by the plantation division’s ongoing accelerated replanting programme. Sime Darby’s Property division’s performance continued to be subdued due to weak domestic property market sentiment. Take-up rates for launched projects have remained modest, contributing to moderate contracted sales of about RM1.3 billion as at end-June 2016.

Among other key divisions, the Industrial division’s earnings are likely to improve following the recovery in commodity prices, which would benefit heavy equipment sales in Australia. This should mitigate the prevailing weak market sentiment in its Singapore and China operations. The Motors division has benefitted from better sales in the luxury segments of Singapore and China/HK’s passenger car markets; nonetheless, potential regulatory changes and weaker consumer sentiment could weigh on performance going forward.

At the holding company level, Sime Darby’s revenue remained flat at RM1.3 billion in FY2016 and is largely contributed by dividends from the Plantation division (55.1%) and Property division (19.7%). The majority of its debt resides with the Plantation division (35%) and at the holding company level (33%). Notwithstanding any potential change in its funding profile associated with the planned corporate exercise, Sime Darby has a relatively manageable debt maturity profile under the rated programmes with the next scheduled principal repayment of RM300 million due only in December 2022.

Contacts:
Saifuruddin Othman, +603-2082 2245/ saifuruddin@marc.com.my,
Taufiq Kamal, +603-2082 2251/ taufiq@marc.com.my.