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Announcement:

Moody's: Palm oil producers benefit from strong industry fundamentals

24 Mar 2014

Singapore, March 24, 2014 -- Moody's Investors Service says that the credit quality of palm oil producers remains strong and is supported by visibility in long-term supply, resilient demand and low, albeit rising, production costs.

"We expect production costs to rise by 10%-15% this year and the price of crude palm oil (CPO) to stay supported above $700 per tonne over the next two to three years," says Dylan Yeo, a Moody's Associate Analyst.

Yeo was speaking on the release of a new special comment entitled "Strong Fundamentals Underpin Credit Quality of Palm Oil Producers", which he co-authored with Alan Greene, Vice President-Senior Credit Officer.

Moody's report states that the growing usage of CPO as a feedstock for biodiesel production will be a key driver of demand growth in the next two years.

Indonesia and Malaysia both launched new biodiesel mandates in the second half of 2013 to spur domestic consumption of CPO. The initiatives were taken in response to slowing Western demand, with the US cutting biodiesel subsidies and the EU imposing anti-dumping levies on Argentinean and Indonesian biodiesel exporters.

"We also expect growth in food-based demand to be stable, backed by an estimated 2.5% increase in Asia's population over the next two years," says Yeo.

"Such food-based demand is largely driven by population growth and changing dietary preferences as a result of rising income levels, particularly in Asia," adds Yeo.

Moody's report furthermore states that palm oil supply is more unpredictable in the short run due to climate changes, although the unique attributes of palm oil cultivation allow for greater visibility in long-term supply.

On the other hand, substitution between vegetable oils will limit the upside in prices.

Moody's expects the three rated producers to maintain strong operating cash flows and to comfortably absorb higher costs within their rating parameters.

In particular, it expects Sime Darby Berhad's (A3 stable) plantation segment, IOI Corporation Berhad's (Baa2 stable) palm oil-related divisions and Golden Agri-Resources Limited (Ba2 stable) to generate approximately $550-$600 million, $250-$300 million and $350-$400 million of funds from operations, respectively, in the upcoming financial year, based on Moody's CPO price assumption of $700-$750 per tonne.

Nevertheless, Moody's report indicates that the rated palm oil producers will need to taper cash usage -- either through reduced dividends or capital expenditure (capex) -- in order to maintain leverage.

Leverage headroom under the producers' rating parameters has declined over the last two years due to higher gross debt and lower CPO prices.

Moody's expects evolving tax laws in Malaysia, Indonesia, and India to impact the profitability of palm oil producers operating in these countries.

Companies with geographically diversified operations, such as Sime Darby, are more insulated from regulatory changes. Producers will also need to address environmental concerns to manage reputational risk.

Subscribers can access the report at: https://www.moodys.com/research/Strong-Fundamentals-Underpin-Credit-Quality-of-Palm-Oil-Producers--PBC_166127

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

Alan Greene
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Philipp L. Lotter
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Moody's: Palm oil producers benefit from strong industry fundamentals
No Related Data.
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