MARKET DEVELOPMENT
Moody's Downgrades Sime Darby to Baa1; Outlook Negative
Moody's Downgrades Sime Darby to Baa1; Outlook Negative
02/03/2016 (Moodys.com) - Moody's Investors Service has downgraded the issuer rating of Sime Darby Berhad and the senior unsecured debt rating on the sukuk issued by Sime Darby Global Berhad -- a wholly-owned subsidiary of Sime Darby and backed by Sime Darby -- to Baa1 from A3.
At the same time, Moody's has downgraded the senior unsecured medium-term note program rating of Sime Darby Global Berhad to (P)Baa1 from (P)A3.
The outlook for the ratings remains negative.
Ratings Rationale
"The downgrade reflects the extended period of weakness evident in Sime Darby's financial profile after it delayed plans to reduce its debt, while cash generation is deteriorating across its key business segments of plantation, industrial and motors because of a tougher operating environment," says Jacintha Poh, a Moody's Assistant Vice President and Analyst.
Moody's notes that Sime Darby's financial profile has been deteriorating in large part since the completion in March 2015 of its heavily debt-funded acquisition of New Britain Palm Oil Ltd. (NBPOL, unrated) for MYR6.0 billion.
In addition, while the company has said since 2014 that it plans to reduce debt after raising fresh capital through several methods -- including initial public offerings for its motor vehicle and Indonesian palm oil businesses, and/or the sale of a stake in NBPOL to strategic investors -- none of these developments have materialized.
Meanwhile, despite the broad spread of its business interests, Sime Darby's operating performance has been impacted across the board by slower growth in China and most of Asia as well as the fall in commodity prices. For the six months ended 31 December 2015, the company's operating profit declined 17% to MYR1.2 billion from a year earlier.
As a result, its financial profile has weakened further; leverage -- as measured by debt/EBITDA -- was 5.2x for the last 12 months ended 31 December 2015 (FY2015: 4.6x; FY2014: 2.3x) and EBITDA/interest coverage was 5.8x (FY2015: 6.8x; FY2014: 11.7x). These levels are beyond Moody's threshold for the A3 rating band.
"The negative ratings outlook reflects the prevalence of, as indicated, a challenging operating environment across most of Sime Darby's businesses, while we continue to watch for moves towards debt reduction -- such as through a sukuk perpetual issuance and asset sales -- to materialize over the next 3-6 months; a failure to deleverage will result in further negative rating action," adds Poh, also Moody's lead Analyst for Sime Darby.
Over the next 12-18 months, we expect Sime Darby's FY2016 operating profit to decline by as much as 10% year on year before improving in FY2017, along with an expected pick-up in crude palm oil (CPO) prices and better profitability at its industrial business because of cost cutting.
Furthermore, Moody's believes that CPO prices have bottomed -- after falling to MYR1,806 per metric ton on 27 August 2015 -- and are poised to rise slightly to average around MYR2,350 over the next 12-18 months
Sime Darby's liquidity is weak as its debt maturity profile is heavily weighted towards short-term funding, with 36% of total outstanding debt as at 31 December 2015 maturing within the next 12 months.
In this context, we consider its cash balances of MYR3.0 billion -- plus Moody's expectation of cash flow from operations of MYR1.5-MYR2.0 billion over the next 12-18 months -- as insufficient to service gross short-term debt of MYR7.3 billion.
However, the company's refinancing risk is partially offset by its strong access to funding due to its government-linked shareholders -- Permodalan Nasional Berhad (unrated) and Employees Provident Fund (unrated). As at 31 December 2015, it had approximately MYR9.0 billion of uncommitted lines available.
The ratings are unlikely to be upgraded, but the outlook could return to stable if Sime Darby: (1) successfully reduces its debt and/or CPO prices improve, resulting in greater cash generation, such that adjusted debt/EBITDA improves to below 3.0x, EBITA/interest expense improves above 6.0x, and RCF/net debt improves to above 20% on a sustained basis; and (2) manages to reduce its reliance on short-term funding.
Any overt and substantial government support will also be viewed favorably.
On the other hand, the ratings could be downgraded if: (1) the company's debt reduction plans fail to materialize over the next 3-6 months; (2) CPO prices fall back below MYR2,000 per metric ton for an extended period; and/or (3) Sime Darby's growth strategy results in an over-extension of its management or financial resources.
Credit metrics that could indicate a downgrade include adjusted debt/EBITDA remaining above 4.0x, EBITA/interest expense below 6.0x, and RCF/net debt below 20% on a sustained basis.
The principal methodology used in these ratings was Business and Consumer Service Industry published in December 2014. Please see the Ratings Methodologies 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 is one of Malaysia's largest listed conglomerates with strong presences in China, Australasia and Southeast Asia. Its core businesses are Plantation, Industrial, Motors, Property and Energy & Utilities. It is 8% directly-owned by Permodalan Nasional Berhad (PNB, unrated), 40% by Skim Amanah Saham Bumiputera (unrated), 6% by other PNB-managed funds, and 13% by Malaysia's Employees Provident Fund (unrated).
At the same time, Moody's has downgraded the senior unsecured medium-term note program rating of Sime Darby Global Berhad to (P)Baa1 from (P)A3.
The outlook for the ratings remains negative.
Ratings Rationale
"The downgrade reflects the extended period of weakness evident in Sime Darby's financial profile after it delayed plans to reduce its debt, while cash generation is deteriorating across its key business segments of plantation, industrial and motors because of a tougher operating environment," says Jacintha Poh, a Moody's Assistant Vice President and Analyst.
Moody's notes that Sime Darby's financial profile has been deteriorating in large part since the completion in March 2015 of its heavily debt-funded acquisition of New Britain Palm Oil Ltd. (NBPOL, unrated) for MYR6.0 billion.
In addition, while the company has said since 2014 that it plans to reduce debt after raising fresh capital through several methods -- including initial public offerings for its motor vehicle and Indonesian palm oil businesses, and/or the sale of a stake in NBPOL to strategic investors -- none of these developments have materialized.
Meanwhile, despite the broad spread of its business interests, Sime Darby's operating performance has been impacted across the board by slower growth in China and most of Asia as well as the fall in commodity prices. For the six months ended 31 December 2015, the company's operating profit declined 17% to MYR1.2 billion from a year earlier.
As a result, its financial profile has weakened further; leverage -- as measured by debt/EBITDA -- was 5.2x for the last 12 months ended 31 December 2015 (FY2015: 4.6x; FY2014: 2.3x) and EBITDA/interest coverage was 5.8x (FY2015: 6.8x; FY2014: 11.7x). These levels are beyond Moody's threshold for the A3 rating band.
"The negative ratings outlook reflects the prevalence of, as indicated, a challenging operating environment across most of Sime Darby's businesses, while we continue to watch for moves towards debt reduction -- such as through a sukuk perpetual issuance and asset sales -- to materialize over the next 3-6 months; a failure to deleverage will result in further negative rating action," adds Poh, also Moody's lead Analyst for Sime Darby.
Over the next 12-18 months, we expect Sime Darby's FY2016 operating profit to decline by as much as 10% year on year before improving in FY2017, along with an expected pick-up in crude palm oil (CPO) prices and better profitability at its industrial business because of cost cutting.
Furthermore, Moody's believes that CPO prices have bottomed -- after falling to MYR1,806 per metric ton on 27 August 2015 -- and are poised to rise slightly to average around MYR2,350 over the next 12-18 months
Sime Darby's liquidity is weak as its debt maturity profile is heavily weighted towards short-term funding, with 36% of total outstanding debt as at 31 December 2015 maturing within the next 12 months.
In this context, we consider its cash balances of MYR3.0 billion -- plus Moody's expectation of cash flow from operations of MYR1.5-MYR2.0 billion over the next 12-18 months -- as insufficient to service gross short-term debt of MYR7.3 billion.
However, the company's refinancing risk is partially offset by its strong access to funding due to its government-linked shareholders -- Permodalan Nasional Berhad (unrated) and Employees Provident Fund (unrated). As at 31 December 2015, it had approximately MYR9.0 billion of uncommitted lines available.
The ratings are unlikely to be upgraded, but the outlook could return to stable if Sime Darby: (1) successfully reduces its debt and/or CPO prices improve, resulting in greater cash generation, such that adjusted debt/EBITDA improves to below 3.0x, EBITA/interest expense improves above 6.0x, and RCF/net debt improves to above 20% on a sustained basis; and (2) manages to reduce its reliance on short-term funding.
Any overt and substantial government support will also be viewed favorably.
On the other hand, the ratings could be downgraded if: (1) the company's debt reduction plans fail to materialize over the next 3-6 months; (2) CPO prices fall back below MYR2,000 per metric ton for an extended period; and/or (3) Sime Darby's growth strategy results in an over-extension of its management or financial resources.
Credit metrics that could indicate a downgrade include adjusted debt/EBITDA remaining above 4.0x, EBITA/interest expense below 6.0x, and RCF/net debt below 20% on a sustained basis.
The principal methodology used in these ratings was Business and Consumer Service Industry published in December 2014. Please see the Ratings Methodologies 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 is one of Malaysia's largest listed conglomerates with strong presences in China, Australasia and Southeast Asia. Its core businesses are Plantation, Industrial, Motors, Property and Energy & Utilities. It is 8% directly-owned by Permodalan Nasional Berhad (PNB, unrated), 40% by Skim Amanah Saham Bumiputera (unrated), 6% by other PNB-managed funds, and 13% by Malaysia's Employees Provident Fund (unrated).