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

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CORPORATES CREDIT OPINION 20 April 2017 New Issue RATINGS Sime Darby Plantation Sdn Bhd Domicile Malaysia Long Term Rating Baa1 Type LT Issuer Rating - Fgn Curr Outlook Stable Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. Contacts Jacintha Poh 65-6398-8320 VP-Senior Analyst [email protected] Diana Beketova 65-6398-3724 Associate Analyst [email protected] Laura Acres 65-6398-8335 MD-Corporate Finance [email protected] Sime Darby Plantation Sdn Bhd New Issuer Report Summary Rating Rationale Sime Darby Plantation Sdn Bhd’s (SDP) Baa1 issuer rating reflects its position as an integrated palm oil producer, with the ability to benefit from the favorable long-term demand fundamentals of the industry. More importantly, the rating reflects its leadership position as one of the largest listed oil palm plantation company globally by planted area and crude palm oil production, and the fact that the company is the leading producer globally of certified sustainable palm oil. SDP’s rating also takes into account its importance to the Malaysian economy and implicit support from its government-linked shareholders: Permodalan Nasional Berhad (PNB, unrated) and Malaysia’s Employees Provident Fund (unrated). On the other hand, the rating is constrained by SDP’s exposure to volatile crude palm oil (CPO) prices, a modest financial profile and weak liquidity position. Nonetheless, we expect refinancing risk to be partially mitigated by SDP’s superior access to trade financing and funds from local and international banks. Rating Outlook The rating outlook is stable, reflecting our expectation that SDP’s management will maintain a prudent and conservative approach towards further investments, as the company pursues growth. Factors that Could Lead to an Upgrade A rating upgrade is unlikely over the near to medium term, but positive momentum could build, if SDP successfully executes its business plans and grows its scale, generates strong positive operating cash flows, and demonstrates sustained improvement in its financial profile, 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 Downgrade SDP’s rating could face downward pressure if: (1) the company fails to implement its business plan, such that its financial profile differs from our expectations; and/or (2) there is a deterioration in palm oil prices, leading to a protracted weakness of SDP’s operations and 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 downgrade could be necessary.

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

Page 1: Sime Darby Plantation Sdn Bhd - Market | Bursa … CREDIT OPINION 20 April 2017 New Issue RATINGS Sime Darby Plantation Sdn Bhd Domicile Malaysia Long Term Rating Baa1 Type LT Issuer

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 [email protected]

Diana Beketova 65-6398-3724Associate [email protected]

Laura Acres 65-6398-8335MD-Corporate [email protected]

Sime Darby Plantation Sdn BhdNew Issuer Report

Summary Rating RationaleSime Darby Plantation Sdn Bhd’s (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.

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

On the other hand, the rating is constrained by SDP’s 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 SDP’s superior access to trade financing and fundsfrom local and international banks.

Rating OutlookThe rating outlook is stable, reflecting our expectation that SDP’s 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 DowngradeSDP’s 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 SDP’s 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.

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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.

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MOODY'S INVESTORS SERVICE CORPORATES

Exhibit 2

SDP’s 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 company’s upstream business is well-placed to partially mitigate some of the industry’s 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, SDP’s 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.

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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 SDP’s upstream palm oil business allows it to achieve significanteconomies of scale and revenue efficiencies, which in turn lower its overall production costs.

Of SDP’s 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. SDP’s 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 renewables.

In FY2016, SDP harvested around 9.6 million MT of FFB (FY2015: 9.4 million MT) and achieved an FFB yield of around 19 MT permature hectare (FY2015: 20 MT per mature hectare).

While the company saw a decline in FFB yield in FY2016 compared with FY2015 — caused by severe weather conditions associatedwith El Nino — its FFB production remained broadly stable, due to the full year contribution from New Britain Palm Oil Limited(unrated), which owns plantations in Papua New Guinea, and which was acquired by SDP in March 2015.

Over the next 12-18 months, we expect that SDP will achieve better FFB yields, as weather conditions normalize, and the companybegins to reap benefits from its innovation initiatives that are aimed at improving harvesting yield and productivity.

At 30 June 2016, SDP had downstream operations in 16 countries where it owns and manages 12 refineries, with a capacity ofapproximately four million MT per annum. It has a production capacity of approximately 700,000 MT of oleochemicals and 300,000MT of biodiesel per annum. In FY2016, approximately 80% of SDP’s upstream products were used in its downstream operations.

While downstream operations continue to grow and contributed to three-quarters of revenue in FY2016, SDP’s upstream operations— which generate higher margins — contributed more than three-quarters of total EBIT. We expect to see a similar trend over the next12-18 months, with EBIT margins from SDP’s upstream operations registering around 40% and downstream operations around 3%(Exhibit 3).

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MOODY'S INVESTORS SERVICE CORPORATES

Exhibit 3

SDP’s Business Model Is Fully Integrated

29%

39%

32%

40%37%

3%1% 3% 3% 3%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0%

20%

40%

60%

80%

100%

Revenue EBIT Revenue EBIT Revenue EBIT Revenue EBIT Revenue EBIT

FY2014 FY2015 FY2016 FY2017 (F) FY2018 (F)

PBIT

Mar

gin

Bre

akdow

n b

etw

een R

even

ue

and P

BIT

Upstream (left axis) Downstream (left axis) Upstream EBIT Margin (right axis) Downstream EBIT Margin (right axis)

Sources: Moody’s Financial Metrics, Moody’s Investors Service estimates

Implicit support from government-linked shareholdersWith a global workforce of around 102,000 employees, the majority of which are in Malaysia, SDP is an important company in thecontext of the Malaysian economy. It supports local communities by providing employment, technical training, smallholder schemesand community development projects, with a focus on education and enhancing quality of life through a safe work environment.

SDP is currently a wholly-owned subsidiary of Sime Darby Berhad. The parent company plans to list SDP as a standalone company onBursa Malaysia, through a dividend in specie distribution. Consequently, if the listing goes ahead, the shareholders of SDP will be thesame as that of Sime Darby Berhad.

PNB — an asset manager and a wholly-owned subsidiary of Yayasan Pelaburan Bumiputera (unrated) — is a Malaysian government-linked investment company. At 31 March 2017, it held 56% of Sime Darby Berhad, through: (1) a direct shareholding of 6%; (2) its unittrust scheme, Skim Amanah Saham Bumiputera's held a 43% stake; and (3) its other managed funds' holdings of 7%. As of the samedate, Malaysia’s Employee Provident Fund held an 11%-stake in Sime Darby Berhad.

We do not regard PNB's presence as a shareholder in the same way that we view the involvement of Khazanah Nasional Berhad inMalaysian companies. Ownership by Khazanah is seen by us as direct ownership by the state, and, in such circumstances, we apply ourjoint default analysis approach for government-related issuers.

By contrast, PNB's responsibility is more to its individual unit trust holders to whom it pays income, while Malaysia’s EmployeeProvident Fund is the country's compulsory pension savings scheme. We therefore expect PNB to seek a healthy dividend flow but toalso prove an accommodative shareholder.

Elevated leverage profile likely to improve over the next 12-18 monthsSDP’s leverage profile was elevated in FY2015 and FY2016, as a result of its heavily debt-funded acquisition of New Britain Palm OilLtd (unrated) in March 2015. We expect that SDP’s leverage will improve substantially in FY2017, on debt reduction and earningsimprovement.

Before SDP’s listing, Sime Darby Berhad will clear the intercompany loans owing from SDP. The parent is reallocating a portion ofits external borrowings to SDP – the USD800 million sukuk bonds issued by Sime Darby Global Berhad, and MYR2.2 billion of sukukperpetual -- and offsetting the rest through a transfer of assets, such that SDP will likely register a total adjusted debt of aroundMYR9.5-MYR10.2 billion in FY2017 and FY2018, lowered from around MYR14.2 billion in FY2016.

Over the next 12-18 months, we expect that SDP’s adjusted debt/EBITDA will improve to around 3.0x from 6.2x in FY2016 and itsadjusted EBITA/interest expense should improve to around 3.5x from 2.1x, owing to an improvement in earnings, led by higher CPOprices (Exhibit 4).

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MOODY'S INVESTORS SERVICE CORPORATES

Exhibit 4

SDP’s Key Financial Metrics Will Improve

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

FY2014 FY2015 FY2016 FY2017 (F) FY2018 (F)

MY

R M

illio

n

Adjusted Debt (left axis) Adjusted Debt/EBITDA (right axis) EBITA/Interest (right axis)

Sources: Moody’s Financial Metrics, Moody’s Investors Service estimates

Liquidity AnalysisAt 30 June 2016, SDP had cash balances of MYR636 million, against total short-term external debt of MYR775 million. In FY2017, weexpect the company to generate cash from operations of around MYR2 billion, the bulk of which will be used to fund capex that weestimate will total around MYR1.6 billion, in addition to a dividend payout of about MYR600 million.

While SDP’s cash and cash inflow amounts are insufficient to cover its short-term obligations, it had about MYR1.7 billion ofcommitted undrawn credit facilities, providing a buffer against its weak liquidity position.

On 18 April 2017, Sime Darby Berhad announced a tender offer and consent solicitation on its USD800 million sukuk bondholders tomove them to SDP. If all bondholders consent to the move — with no tenders — SDP will face refinancing risk, because USD400 millionof the sukuk will mature in January 2018, while the other USD400 million matures only in January 2023. We view that such a risk willbe mitigated by SDP’s strong and proven track record of access to funding provided by local and international banks.

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MOODY'S INVESTORS SERVICE CORPORATES

Rating Methodology and Scorecard FactorsWhen mapped to Moody's Global Rating Methodology for Protein and Agriculture Industry, the grid indicated rating for SDP is Ba2,based on its financials for the full year ended 30 June 2016 (Exhibit 5).

The actual Baa1 rating reflects: (1) SDP’s market leadership position within the palm oil industry; (2) implicit support from itsgovernment-linked shareholders; and (3) our expectation that SDP’s leverage and coverage metrics will improve, largely driven by debtreduction. Specifically, the intercompany loans from Sime Darby Berhad will be offset by the transfer of assets.

Exhibit 5

Protein and Agriculture Industry Grid [1]

Factor 1 : SCALE & DIVERSIFICATION (20%) Measure Score Measure Score

a) Total Sales (USD Billion) $2.9 Ba $3.0 - $3.5 Ba

b) Geographic Diversification Baa Baa Baa Baa

c) Segment Diversification Ba Ba Ba Ba

Factor 2 : BUSINESS POSITION (25%)

a) Market Share A A A A

b) Product Portfolio Profile Baa Baa Baa Baa

c) Earnings Stability Baa Baa Baa Baa

Factor 3 : FINANCIAL POLICY (15%)

a) Financial Policy Baa Baa Baa Baa

Factor 4 : LEVERAGE & COVERAGE (40%)

a) CFO / Net Debt 11% B 20% - 23% Ba

b) Debt / EBITDA 6.2x Caa 2.9x - 3.2x Ba - Baa

c) EBITA / Interest Expense 2.1x B 3.4x - 3.7x Ba

d) Debt / Book Capitalization 54% Ba 35% - 38% Baa

Rating:

a) Indicated Rating from Grid Ba2 Baa3

b) Actual Rating Assigned Baa1

Current

06/30/2016

Moody's 12-18 Month Forward View

As of 06/30/2016 [2]

[1]All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. [2] This represents Moody's forward view; not theview of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures.Source: Moody's Financial Metrics

Ratings

Exhibit 7Category Moody's RatingSIME DARBY PLANTATION SDN BHD

Outlook StableIssuer Rating Baa1

Source: Moody's Investors Service

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MOODY'S INVESTORS SERVICE CORPORATES

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