Sime Darby Plantation Sdn Bhd - Market | Bursa CREDIT OPINION 20 April 2017 New Issue RATINGS Sime...

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Transcript of Sime Darby Plantation Sdn Bhd - Market | Bursa CREDIT OPINION 20 April 2017 New Issue RATINGS Sime...

  • CORPORATES

    CREDIT OPINION20 April 2017

    New Issue

    RATINGS

    Sime Darby Plantation Sdn BhdDomicile Malaysia

    Long Term Rating Baa1

    Type LT Issuer Rating - FgnCurr

    Outlook Stable

    Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

    Contacts

    Jacintha Poh 65-6398-8320VP-Senior Analystjacintha.poh@moodys.com

    Diana Beketova 65-6398-3724Associate Analystdiana.beketova@moodys.com

    Laura Acres 65-6398-8335MD-Corporate Financelaura.acres@moodys.com

    Sime Darby Plantation Sdn BhdNew Issuer Report

    Summary Rating RationaleSime Darby Plantation Sdn Bhds (SDP) Baa1 issuer rating reflects its position as an integratedpalm oil producer, with the ability to benefit from the favorable long-term demandfundamentals of the industry.

    More importantly, the rating reflects its leadership position as one of the largest listed oilpalm plantation company globally by planted area and crude palm oil production, and thefact that the company is the leading producer globally of certified sustainable palm oil.

    SDPs rating also takes into account its importance to the Malaysian economy and implicitsupport from its government-linked shareholders: Permodalan Nasional Berhad (PNB,unrated) and Malaysias Employees Provident Fund (unrated).

    On the other hand, the rating is constrained by SDPs exposure to volatile crude palm oil(CPO) prices, a modest financial profile and weak liquidity position. Nonetheless, we expectrefinancing risk to be partially mitigated by SDPs superior access to trade financing and fundsfrom local and international banks.

    Rating OutlookThe rating outlook is stable, reflecting our expectation that SDPs management will maintaina prudent and conservative approach towards further investments, as the company pursuesgrowth.

    Factors that Could Lead to an UpgradeA rating upgrade is unlikely over the near to medium term, but positive momentum couldbuild, if SDP successfully executes its business plans and grows its scale, generates strongpositive operating cash flows, and demonstrates sustained improvement in its financialprofile, such that cash flows from operations/net debt is above 35%-40%, adjusted debt/EBITDA is below 2.0x, and EBITA/interest expense is above 6.0x.

    Factors that Could Lead to a DowngradeSDPs rating could face downward pressure if: (1) the company fails to implement itsbusiness plan, such that its financial profile differs from our expectations; and/or (2) thereis a deterioration in palm oil prices, leading to a protracted weakness of SDPs operationsand credit profile. We consider an adjusted debt/EBITDA above 3.5x and an adjusted EBITA/interest expense of less than 3.0x on a sustained basis, as indications that a rating downgradecould be necessary.

    https://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBC_1069617

  • MOODY'S INVESTORS SERVICE CORPORATES

    Key Indicators

    Exhibit 1

    06/30/2016 06/30/2015

    Total Sales (USD Billion) $2.9 $3.0

    CFO / Net Debt 11% 10%

    Debt / EBITDA 6.2x 6.8x

    EBITA / Interest Expense 2.1x 3.9x

    Debt / Book Capitalization 54% 54%

    Note: All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations.Source: Moody's Financial Metrics

    Credit Strengths

    Market leadership position within the upstream palm oil segment

    Integrated palm oil player, with operations along the entire palm oil value chain

    Well-positioned to benefit from the favorable long-term outlook for palm oil demand

    Implicit support from government-linked shareholders

    Proven track record of access to funding mitigates refinancing risk

    Credit Challenges

    Inherent exposure to CPO price risk

    Elevated leverage profile likely to improve over the next 12-18 months

    Weak liquidity position

    Corporate ProfileSime Darby Plantation Sdn Bhd (SDP) is an integrated plantation company with a business that spans the entire palm oil value chain.SDP is currently a wholly-owned subsidiary of Sime Darby Berhad (Baa1 review for downgrade). The parent company plans to list SDPas a standalone company on Bursa Malaysia by end-2017, through a dividend in specie distribution. Consequently, the shareholders ofSDP will be the same as that of Sime Darby Berhad (Exhibit 2).

    This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

    2 20 April 2017 Sime Darby Plantation Sdn Bhd: New Issuer Report

  • MOODY'S INVESTORS SERVICE CORPORATES

    Exhibit 2

    SDPs Shareholding Structure Post Spin-Off by Sime Darby BerhadCurrent Shareholding Structure

    6% 43% 7% 11% 33%

    100% 100% 100% 100%

    Shareholding Structure Post Dividend In Specie Distribution

    6% 43% 7% 11% 33%

    100% 100%

    Sime Darby

    Motors

    Sime Darby

    IndustrialOthers

    Sime Darby Plantation Sime Darby Berhad Sime Darby Property

    Sime Darby Berhad

    Permodalan Nasional

    Berhad

    Skim Amanah Saham

    BumiputeraPNB-Managed Funds

    Employees Provident

    FundOther Shareholders

    Sime Darby Plantation Sime Darby

    Motors

    Sime Darby

    IndustrialSime Darby Property Others

    Permodalan Nasional

    Berhad

    Skim Amanah Saham

    Bumiputera

    Employees Provident

    FundOther ShareholdersPNB-Managed Funds

    Note: Shareholding data are as of 31 March 2017Source: Sime Darby Berhad

    Detailed Rating ConsiderationsMarket leadership position within the upstream palm oil segmentSDP is one of the largest listed oil palm plantation company globally by planted area and CPO production. It is also the leadingproducer globally of certified sustainable palm oil, according to the Roundtable of Sustainable Palm Oil.

    The companys upstream business is well-placed to partially mitigate some of the industrys key risks, including: (1) weather challenges;(2) changes in export/import duties by producing/consuming countries; and/or (3) compliance with sustainability practices, given thatinvestors are paying increasing attention to environmental, social and governance (ESG) issues, and have urged palm oil producers toadopt and strictly implement sustainable practices that allow for strong monitoring and mitigation of negative ESG impacts.

    At 30 June 2016, SDPs land bank totaled around one million hectares (ha), of which, 603,254 ha were oil palm planted areas acrossfive countries: Malaysia, Indonesia, Papua New Guinea, Liberia and Solomon Islands. The geographically diversified land bank canpartially mitigate regulatory risk associated with changes on duties, as well as provide a natural hedge against weather challenges, andenable SDP to enjoy an alternative calendar crop cycle in Papua New Guinea and the Solomon Islands.

    3 20 April 2017 Sime Darby Plantation Sdn Bhd: New Issuer Report

  • MOODY'S INVESTORS SERVICE CORPORATES

    For its fiscal year ended 30 June 2016 (FY2016), SDP produced around 2.4 million metric tons (MT) of CPO, which representedapproximately 4% of global production. The size and scale of SDPs upstream palm oil business allows it to achieve significanteconomies of scale and revenue efficiencies, which in turn lower its overall production costs.

    Of SDPs 2.4 million MT of CPO production, around 2.2 million MT represented certified sustainable palm oil, which was equivalent toapproximately 21% of global production. SDPs strong commitment to sustainability should help mitigate the negative ESG impactsand position it well for growth, because certified sustainable palm oil and its derivatives are increasingly required by leading global foodand household product companies, although currently, there is no material premium for the certified product.

    Inherent exposure to CPO price risk but long-term outlook for palm oil demand is favorableOver the past decades, the global consumption of palm oil has grown, and we expect long-term demand for palm oil to remainfavorable, supported by: (1) greater consumption in developing countries such as Indonesia, India and China as their GDPs grow;(2) health-conscious consumers in developed countries with a preference for vegetable oils; (3) the low production cost of CPO,compared to other edible oil sources; and (4) increased demand for biodiesel in Western nations and palm oil producing countries.

    Although SDP is well-positioned to benefit from the favorable long-term demand for palm oil, it is exposed to the volatility of CPOprices, driven by the supply of CPO, as well as prices for other edible oils such as soybean, rapeseed/canola and corn with suchsources able to substitute CPO in many applications.

    The supply of CPO is determined by fresh fruit bunch (FFB) yields and oil extraction rates that can be affected by extreme weatherconditions, the application of fertilizers, and the age profile of oil palm trees. In general, output of CPO is seasonal, with the July-September quarter typically proving the strongest across Malaysia and Indonesia, and the January-March quarter the weakest in termsof FFB harvesting for oil palm plantations.

    Integrated palm oil player, with operations along the entire palm oil value chainSDP is an established integrated palm oil producer, with operations along the entire value chain, including the production and sale ofupstream byproduct such as crude palm oil and palm kernel oil as well as downstream products, such as food and non-food basedoils and fats, oleochemicals, biodiesel and renewabl