SINGAPORE, July 3 — Moody’s Investors Service (Moody’s) has affirmed the Baa1 issuer rating of Sime Darby Plantation Bhd (SDP) with a stable outlook.
The outlook is maintained at stable, reflecting Moody’s expectation that SDP would prioritise proceeds from asset sales to reduce debts and maintain profitable operations, despite volatile palm oil prices.
“While weak palm oil prices have reduced SDP’s earnings, we expect the company to maintain its credit profile through a substantial debt reduction using proceeds from its planned RM1 billion asset sales this year,” said Moody’s Analyst, Maisam Hasnain in a statement today.
According to Moody’s, SDP derives the majority of its earnings from its upstream operations of oil palm cultivation and crude palm oil (CPO) production.
The decline in palm oil prices has resulted in SDP’s leverage—as measured by adjusted debt to earnings before interest, tax, depreciation and amortization (EBITDA) -- increasing to around 4.0 times as of March 2019 from around 2.5 times in June 2018, breaching its rating downward trigger of 3.5 times, it said.
However, based on medium-term price assumptions for CPO of RM2,100 per metric tonne, and the deployment of proceeds from planned land sales and asset disposals to debt reduction, Moody’s expects SDP’s adjusted leverage to decline to around 3.3 times by December 2019.
Moody’s said SDP’s Baa1 ratings reflect among others, its position as the largest palm oil producer globally by planted area, that it would maintain efficient and profitable operations that span across the palm oil value chain and maintains prudent financial policies, including a conservative approach to further investments.
To reduce earnings volatility, Moody’s said SDP plans to increase the earnings contribution from its downstream business to between 15 per cent-20 per cent of consolidated profit before earnings and tax (PBIT) in 2023, from 11 per cent for the fiscal year ended June 2018.
Increased earnings diversity through organic means will be credit positive, but any large debt-funded acquisitions to achieve this target, could lead to negative ratings pressure, it said.
Moody’s expects SDP’s liquidity profile to remain weak, as its cash sources would be insufficient to meet uses, including scheduled debt maturities, capital spending and dividends over the next 12-15 months.
SDP’s scheduled debt maturities include RM760 million in term loans with a bullet maturity in June 2020.
However, SDP’s refinancing risks are partially offset by its strong access to funding from domestic and international banks, particularly due to its government of Malaysia-linked shareholders, Permodalan Nasional Bhd and the Employees Provident Fund. — Bernama