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Rating Action:

Moody's affirms Sime Darby's ratings at A3; changes outlook to negative

04 Sep 2015

Singapore, September 04, 2015 -- Moody's Investors Service has affirmed Sime Darby Berhad's (SDB) A3 issuer rating and A3 senior unsecured debt rating on the Sukuk issued by Sime Darby Global Berhad, a wholly--owned subsidiary of SDB and backed by SDB. Sime Darby Global Berhad's (P)A3 senior unsecured MTN programme rating has also been affirmed.

The outlook for both ratings is negative.

RATINGS RATIONALE

Despite the broad spread of its business interests, SDB has been impacted across the board by the slower rate of growth in China and most Asia-Pacific economies combined with lower commodity prices and a weaker domestic currency. This has seen leverage surge to over 4x for the year ended 30 June 2015 from 1.5x for FY2012.

"The A3 rating is not sustainable at 4x leverage, but the company, during last week's results briefing, indicated that over the next six to nine months gearing -- as measured by debt/equity - could fall to around 35%-40% from 58% currently. On that basis, and given the company's long track record, the rating action has been limited to a negative outlook at this time. However, failure to deliver on the de-gearing within six months could lead to further erosion in SDB's ratings," says Alan Greene, a Moody's Vice President and Senior Credit Officer.

SDB is the world's largest palm oil producer and the plantation division remains profitable despite palm oil pricing hitting a six-year low at less than MYR2,000/tonne. SDB's credit profile also benefits from the diversity afforded by it its Motors, Property and Industrial divisions which hold good market positions. However, Motors and particularly Industrial have struggled in the current environment of slowing regional economic growth and lower coal prices, and supporting the inventory and rental equipment needs of these divisions added to the pressure on the Group's cash flow in FY2015.

SDB's palm oil output, measured on a last twelve months basis, was on a declining trend between September 2013 and March 2015, largely due to unfavourable weather conditions. However, the substantially debt-funded acquisition of New Britain Palm Oil Limited (NBPOL) in early March boosted SDB's plantation area by 15% and coupled with better operating conditions in Malaysia, SDB's output of fresh fruit bunches for the three months ended July 2015 was 22% higher than for the three months ended April 2015.

In FY2015 SDB achieved EBITDA of MYR4.5 billion compared to MYR5.5 billion in FY2014 reflecting declining CPO prices, and a sharp fall in Industrial's contribution. During this time, reported gross debt climbed to MYR18.2 billion from MYR11.3 billion even as free cash balances declined by MYR0.7 billion.

The rise in debt was largely driven by the MYR6.9 billion acquisition of NBPOL and its debt, where the price paid was full with respect to current CPO prices and the MYR/GBP exchange rate.

"While management has pared back investment, sold several non-core assets and relied heavily on its Property business to contribute cash and profits, based on the outlook for Motors and Industrial, and given current CPO prices, EBITDA or FFO are insufficient on their own to reduce leverage in a timely manner," adds Greene, Moody's Lead Analyst for SDB.

SDB has mooted larger disposals but market conditions for an IPO of Motors or even a partial sale of its Indonesian plantations are not considered by management to be supportive.

The group has uncommitted facilities and proven access to finance in Malaysia, but liquidity is nevertheless a concern, with short-term net debt of MYR2.7 billion compared to our estimated FFO in FY2016 of MYR3.2 billion based on an average CPO price of MYR2,240/tonne. Moody's forecast anticipates some liquidity and profit support from the on-going sale of assets, but the easier disposals have probably been made. However, SDB retains a significant landbank in Malaysia close to conurbations with very high potential development value, as well as its 40% stake in the popular Battersea power station re-development project in London.

SDB's largest single shareholder is Permodalan Nasional Berhad (PNB, unrated) a state-owned asset manager whose 52% shareholding in Sime Darby is largely in accounts representing pension investments and unit trust sales to the public in Malaysia. Moody's notes that PNB partook in the scrip dividend scheme offered in January 2015.

"While SDB is widely viewed as a Government Linked Company, Moody's regards SDB as a relatively independent business, albeit with a supportive shareholder. No formal uplift is incorporated into the current rating," notes Greene.

The outlook is negative and could crystallise into a downgrade if substantial debt reduction fails to materialize in the next six months such that adjusted debt/ebitda remains above 2.5x.

The rating is unlikely to be upgraded or the outlook restored to stable even with a large reduction in debt levels given the current environment for its key businesses, although overt and substantial government support would be viewed favourably. Nevertheless, higher CPO prices resulting in much greater cash generation coupled with an improved debt maturity profile could support a stable outlook.

The principal methodology used in these ratings was Business and Consumer Service Industry published in December 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Sime Darby Berhad is headquartered in Malaysia and listed on Bursa Securities Malaysia. It reported revenues of MYR44 billion in FY2015 and cultivates 605,000 hectare of palm oil plantation. As of 3 September 2015 its market capitalization was MYR46 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The following information supplements Disclosure 10 ("Information Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J) of SEC Rule 17g-7") in the regulatory disclosures made at the ratings tab on the issuer/entity page on www.moodys.com for each credit rating:

Moody's was not paid for services other than determining a credit rating in the most recently ended fiscal year by the person that paid Moody's to determine this credit rating.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

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: (852) 3551-3077

Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

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: (852) 3551-3077

Moody's affirms Sime Darby's ratings at A3; changes outlook to negative
No Related Data.
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