AA ratings from MARC denote "a very strong ability to make payment on the instrument issued under the Islamic financing contract(s). Risk is slight with degree of certainty for timely payment marginally lower than for instruments accorded the highest rating", against AAA ratings, "extremely strong ability to make payment on.the instrument issued..". MARC-1 ratings also refer to an "extremely strong capacity to make timely payment on the instrument issued under the Islamic financing contract(s)".
The rating outlook on the Perpetual Sukuk programme is negative, consistent with the revised outlook on the ICP/IMTN to negative from stable. The two-notch rating differential between the Perpetual Sukuk and IMTN is in line with MARC’s notching principles on hybrid securities.
The negative outlook revision factors in the slower-than-expected pace of measures initiated thus far to address the substantial increase in group borrowings following the debt-funded acquisition of New Britain Palm Oil Limited (NBPOL) for RM6 billion in March 2015. Some of the group’s earlier plans to pare down its debt have been postponed owing to weak market conditions. Additionally, the group’s key business segments have continued to face a tough operating environment, leading to weaker earnings and cash flow generation that have put pressure on its credit metrics. These factors notwithstanding, the affirmed ratings reflect Sime Darby’s geographical diversity of and significant market position in the oil palm plantation, property, motors and industrial segments. The group’s strong financial flexibility which also stems from its status as a government-linked corporation supports the rating affirmation.
MARC notes that Sime Darby’s plan to issue the Perpetual Sukuk is a major first step to improve the group’s liquidity profile; initial proceeds from the issuance would be utilised to meet upcoming financial obligations. As the Perpetual Sukuk receives 50% equity credit in line with MARC’s approach in evaluating hybrid securities, group debt-to-equity would improve to 0.53 times from 0.60 times, assuming the full drawdown of RM3 billion is utilised for debt repayment. MARC understands that the group is working on other initiatives to strengthen its balance sheet, including equity placements, monetising non-core assets and divestments. Nonetheless, MARC remains concerned on the implementation timeline given the prevailing challenging conditions.
The low crude palm oil (CPO) price environment has continued to weigh on the Plantation division’s performance; the average CPO selling price was lower at RM2,193/metric ton (MT) for the financial year ended June 30, 2015 (FY2015) (FY2014: RM2,451/MT). Despite an increase in fresh fruit bunch production, owing to NBPOL’s contribution from its 82,068 hectares (ha) of cultivated oil palm since its acquisition in March 2015, the Plantation division’s revenue and profit before interest and tax (PBIT) declined by 6.3% year on year (YoY) and 38.8% YoY to RM10,268.6 million and RM1,148.1 million in FY2015.
The group’s Industrial division continues to be affected by lower heavy equipment sales due mainly to the weak Australian mining sector. For FY2015, the division’s revenue and PBIT declined by 9.5% YoY and 48.5% YoY to RM10,558.2 million and RM521.2 million respectively. Its Motors division’s performance was hampered by margin pressures despite recording higher sales; PBIT declined by 25.4% YoY to RM473.6 million against the 5.1% YoY revenue growth to RM18,646.3 million in FY2015. The group’s China motor markets have also been affected by stringent regulations aimed at reducing road congestion and curbing luxury spending. The improved sales were, however, supported by its Vietnam, Australia and New Zealand markets.
The weaker performance of its Plantation, Industrial and Motors divisions were moderated by Sime Darby’s Property division’s improved performance; better sales at its new launches in existing township developments Elmina and Bandar Ainsdale as well as disposal of land parcels and a joint-venture project supported the overall performance during FY2015. The Property division recorded a revenue increase of 23.8% YoY to RM3,455.0 million and PBIT increase of 48.3% YoY to RM889.4 million. MARC notes that the sizeable contracted sales (unbilled sales) of RM1.3 billion as at end-June 2015 will provide earnings visibility over the intermediate term. Additionally, the group’s diverse property mix that includes township developments, sizeable land bank, property investments and foreign property venture should provide a buffer against headwinds in the domestic property sector.
For FY2015, consolidated group revenue declined marginally to RM43.7 billion but PBIT declined by 28.9% YoY to RM3.3 billion. The group incurred higher finance costs due to the increase in borrowings to RM18.1 billion as at end-FY2015. This rose to RM19.7 billion as at end-Q1FY16, leading to gross and net debt/equity (DE) ratios of 0.60 times and 0.49 times respectively. The group has a strong liquidity position with cash balance of about RM4.2 billion as at end-FY2015 in addition to significant unutilised credit lines.
At the holding company level, Sime Darby’s revenue decreased to RM1.3 billion in FY2015 (FY2014: RM2 billion) largely due to lower dividends received from the Plantation and Industrial divisions. The Plantation division is expected to remain the main dividend contributor, having accounted for 47.8% of total dividend income in FY2015 (FY2014: 49.1%).
Downward rating pressure would increase should the performance of the group’s key divisions further weaken its consolidated credit profile. Any revision in the rating outlook to stable would depend on the pace and scale of deleveraging efforts that would restore the group’s financial metrics to its historic level, including the group gearing level between 0.30 times and 0.40 times.
The negative outlook revision factors in the slower-than-expected pace of measures initiated thus far to address the substantial increase in group borrowings following the debt-funded acquisition of New Britain Palm Oil Limited (NBPOL) for RM6 billion in March 2015. Some of the group’s earlier plans to pare down its debt have been postponed owing to weak market conditions. Additionally, the group’s key business segments have continued to face a tough operating environment, leading to weaker earnings and cash flow generation that have put pressure on its credit metrics. These factors notwithstanding, the affirmed ratings reflect Sime Darby’s geographical diversity of and significant market position in the oil palm plantation, property, motors and industrial segments. The group’s strong financial flexibility which also stems from its status as a government-linked corporation supports the rating affirmation.
MARC notes that Sime Darby’s plan to issue the Perpetual Sukuk is a major first step to improve the group’s liquidity profile; initial proceeds from the issuance would be utilised to meet upcoming financial obligations. As the Perpetual Sukuk receives 50% equity credit in line with MARC’s approach in evaluating hybrid securities, group debt-to-equity would improve to 0.53 times from 0.60 times, assuming the full drawdown of RM3 billion is utilised for debt repayment. MARC understands that the group is working on other initiatives to strengthen its balance sheet, including equity placements, monetising non-core assets and divestments. Nonetheless, MARC remains concerned on the implementation timeline given the prevailing challenging conditions.
The low crude palm oil (CPO) price environment has continued to weigh on the Plantation division’s performance; the average CPO selling price was lower at RM2,193/metric ton (MT) for the financial year ended June 30, 2015 (FY2015) (FY2014: RM2,451/MT). Despite an increase in fresh fruit bunch production, owing to NBPOL’s contribution from its 82,068 hectares (ha) of cultivated oil palm since its acquisition in March 2015, the Plantation division’s revenue and profit before interest and tax (PBIT) declined by 6.3% year on year (YoY) and 38.8% YoY to RM10,268.6 million and RM1,148.1 million in FY2015.
The group’s Industrial division continues to be affected by lower heavy equipment sales due mainly to the weak Australian mining sector. For FY2015, the division’s revenue and PBIT declined by 9.5% YoY and 48.5% YoY to RM10,558.2 million and RM521.2 million respectively. Its Motors division’s performance was hampered by margin pressures despite recording higher sales; PBIT declined by 25.4% YoY to RM473.6 million against the 5.1% YoY revenue growth to RM18,646.3 million in FY2015. The group’s China motor markets have also been affected by stringent regulations aimed at reducing road congestion and curbing luxury spending. The improved sales were, however, supported by its Vietnam, Australia and New Zealand markets.
The weaker performance of its Plantation, Industrial and Motors divisions were moderated by Sime Darby’s Property division’s improved performance; better sales at its new launches in existing township developments Elmina and Bandar Ainsdale as well as disposal of land parcels and a joint-venture project supported the overall performance during FY2015. The Property division recorded a revenue increase of 23.8% YoY to RM3,455.0 million and PBIT increase of 48.3% YoY to RM889.4 million. MARC notes that the sizeable contracted sales (unbilled sales) of RM1.3 billion as at end-June 2015 will provide earnings visibility over the intermediate term. Additionally, the group’s diverse property mix that includes township developments, sizeable land bank, property investments and foreign property venture should provide a buffer against headwinds in the domestic property sector.
For FY2015, consolidated group revenue declined marginally to RM43.7 billion but PBIT declined by 28.9% YoY to RM3.3 billion. The group incurred higher finance costs due to the increase in borrowings to RM18.1 billion as at end-FY2015. This rose to RM19.7 billion as at end-Q1FY16, leading to gross and net debt/equity (DE) ratios of 0.60 times and 0.49 times respectively. The group has a strong liquidity position with cash balance of about RM4.2 billion as at end-FY2015 in addition to significant unutilised credit lines.
At the holding company level, Sime Darby’s revenue decreased to RM1.3 billion in FY2015 (FY2014: RM2 billion) largely due to lower dividends received from the Plantation and Industrial divisions. The Plantation division is expected to remain the main dividend contributor, having accounted for 47.8% of total dividend income in FY2015 (FY2014: 49.1%).
Downward rating pressure would increase should the performance of the group’s key divisions further weaken its consolidated credit profile. Any revision in the rating outlook to stable would depend on the pace and scale of deleveraging efforts that would restore the group’s financial metrics to its historic level, including the group gearing level between 0.30 times and 0.40 times.
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Refer to MARC's rating definitions (PDF, from page 53)