MARKET DEVELOPMENT
Sime Darby Outlook Revised
Sime Darby Outlook Revised
31/03/2015 (The Star) - Fitch Ratings has revised its outlook on Sime Darby Bhd’s long-term foreign and local currency issuer default ratings (IDR) to “negative” from “stable,” following the steep increase in the company’s funds from operations (FFO) adjusted net leverage.
According to the rating agency, Sime Darby’s FFO-adjusted net leverage rose 2.5 times in the first half of the financial year ended June 30, 2015 (FY15), which was well above the 1.75 times that Fitch considered “negative rating action.”
“While Fitch expected the increase in leverage after the debt-funded acquisition of New Britain Palm Oil Ltd, the agency estimates the deleveraging process will take longer than initially expected due to the weaker than expected performance of Sime’s industrial equipment business and higher net debt to fund the property development business,” it said.
“Given the weak commodity environment, Sime’s industrial equipment business will continue to face challenges over the short to medium term.”
The rating agency said the weaker performance of Sime’s industrial division was one of the key influential factors for the company’s rating revision.
“Earnings before interest and tax in Sime’s industrial division declined by 46% to RM316.2mil in the first half of financial year 2015 due to the continuing weakness in the Australian mining sector, which resulted in lower equipment deliveries and lower margin from product support sales.
“Profit in its Malaysia and Singapore operations also fell due to lower equipment and engine sales due to the slowdown in the construction, mining and shipyard sectors, while in China and Hong Kong, profit improved due to better margins from equipment deliveries.”
Fitch added that commodity prices continued to fall to near marginal production cost, resulting in intense pressure on the product support business.
The rating agency affirmed both of Sime Darby’s senior unsecured rating and US$1.5bil (RM5.6bil) sukuk issue rating at “A”.
“Sime Darby proposes to engage in capital management initiatives that could include the listing of its motor division by end-FY16, which, if successful, would result in financial leverage declining towards Fitch’s negative trigger of 1.75 times.”
Fitch also noted that as Sime Darby was an integrated low-cost crude palm oil operator, its downstream division benefited from declining input costs.
“But this is not adequate to offset the price decline. Fitch believes that the company will tide over this period of low prices, but margins – in US dollar and per tonne terms – would remain depressed in the next 12 to 18 months.”
According to the rating agency, Sime Darby’s FFO-adjusted net leverage rose 2.5 times in the first half of the financial year ended June 30, 2015 (FY15), which was well above the 1.75 times that Fitch considered “negative rating action.”
“While Fitch expected the increase in leverage after the debt-funded acquisition of New Britain Palm Oil Ltd, the agency estimates the deleveraging process will take longer than initially expected due to the weaker than expected performance of Sime’s industrial equipment business and higher net debt to fund the property development business,” it said.
“Given the weak commodity environment, Sime’s industrial equipment business will continue to face challenges over the short to medium term.”
The rating agency said the weaker performance of Sime’s industrial division was one of the key influential factors for the company’s rating revision.
“Earnings before interest and tax in Sime’s industrial division declined by 46% to RM316.2mil in the first half of financial year 2015 due to the continuing weakness in the Australian mining sector, which resulted in lower equipment deliveries and lower margin from product support sales.
“Profit in its Malaysia and Singapore operations also fell due to lower equipment and engine sales due to the slowdown in the construction, mining and shipyard sectors, while in China and Hong Kong, profit improved due to better margins from equipment deliveries.”
Fitch added that commodity prices continued to fall to near marginal production cost, resulting in intense pressure on the product support business.
The rating agency affirmed both of Sime Darby’s senior unsecured rating and US$1.5bil (RM5.6bil) sukuk issue rating at “A”.
“Sime Darby proposes to engage in capital management initiatives that could include the listing of its motor division by end-FY16, which, if successful, would result in financial leverage declining towards Fitch’s negative trigger of 1.75 times.”
Fitch also noted that as Sime Darby was an integrated low-cost crude palm oil operator, its downstream division benefited from declining input costs.
“But this is not adequate to offset the price decline. Fitch believes that the company will tide over this period of low prices, but margins – in US dollar and per tonne terms – would remain depressed in the next 12 to 18 months.”