Monday, Dec 16, 2019
MARC has affirmed Sime Darby Plantation Berhad’s (SD
Plantation) corporate credit rating at AAA, and its
Perpetual Subordinated Sukuk Programme (Perpetual Sukuk) of up to RM3.0
billion at AAIS. The ratings outlook
is stable.
The affirmed corporate credit rating is driven by SD
Plantation’s strong cash flow generating ability from its sizeable,
geographically-diversified and integrated oil palm operations. The key
moderating factor is the susceptibility of the group’s performance to
crude palm oil (CPO) price movement, which in recent years has exerted
pressure on its financial metrics. The rating benefits from a notch uplift for
implicit support from parent Permodalan Nasional Berhad, a
government-linked investment company that has historically extended support to
the plantation company.
SD Plantation is one of the largest palm oil plantation groups
globally with significant upstream operations in Malaysia, Indonesia,
Papua New Guinea and Solomon Islands and sizeable downstream
operations domestically and in the Netherlands, the UK, South Africa,
Indonesia and Thailand, among others. The impending exit from Liberia
where SD Plantation has 10,263 ha or 1.7% of total planted area of 603,146 ha
is regarded as not material to the group’s operations. Given the
group had faced considerable challenges in Liberia since beginning operations
there, the full divestment of its loss-making Liberian operations
would strengthen its focus on its key Malaysian and
Indonesian plantations.
SD Plantation’s accelerated replanting programme since 2015,
particularly in Indonesia, has led to an overall improvement in its plantation
maturity profile: around 30% of its oil palms are currently in the prime
maturity stage (aged nine to 18 years) with an average palm tree age of 12.1
years as at end-9M2019. About RM700 million p.a. of an expected capex
spending of RM1.5 billion p.a. over the next three years has been
earmarked for replanting activities, notwithstanding the challenging CPO price
environment.
During 9M2019, SD Plantation recorded lower average CPO price of
RM2,007/MT for its continuing operations, leading to lower revenue of RM8.7
billion (9M2018: RM2,322/MT; RM9.8 billion). Cash flow from operations (CFO)
declined to RM1.2 billion (9M2018: RM1.9 billion). Its adjusted borrowings
since assuming debt from its related entities during the demerger exercise have
remained high, at RM8.9 billion while its debt-to-equity
ratio was at 0.60x as at end-9M2019. MARC understands SD
Plantation will address the group’s weakening debt
metrics through proceeds from impending disposals of non-core
land parcels amounting to about RM1 billion. The divestment of
its Liberian operations is also part of the group’s exercise
to dispose of underperforming assets. The group recorded an
impairment of RM256 million during 9M2019 and could recover some of its
investment through the disposal of its Liberian operations. With the proceeds
from asset sales, group leverage is expected to improve to about 0.5x.
The rating agency also notes that SD Plantation’s strong
upstream operational performance and improving downstream financial performance
provide some mitigation against CPO price challenges. For 9M2019, the
improvement in maturity profile contributed to higher fresh fruit bunch (FFB)
yield per mature hectare for continuing operations to 15.25MT/ha
(9M2018:15.05MT/ha) and higher oil extraction rate (OER) to 21.50%
(9M2018: 21.08%). SD Plantation’s cash generation ability is expected to be
sustainable as the group’s production cost remains competitive
owing largely to its large-scale operations.
Notwithstanding the group’s dividend payout policy of at least
50% of its net profit, SD Plantation is expected to maintain a
disciplined dividend payout approach to meet the group’s capex
requirement without any recourse to borrowings. The stable outlook factors in
expectations of debt reduction through proceeds from asset sales.
However, if there is no visible progress towards this end or if a prolonged low
CPO price environment impacts its cash flow metrics, the rating would
come under pressure.
Contacts:
Raj Shankar, +603-2717
2956/ rajshankar@marc.com.my;
Taufiq Kamal, +603-2717
2951/ taufiq@marc.com.my