Pressure on Sime Darby to cut down on debts

 

 

In its latest report, S&P downgraded Sime Darby to BBB+ from A- with a negative outlook.

 

“We lowered the ratings because of uncertainties in the implementation of Sime Darby’s deleveraging measures,” said S&P credit analyst Bertrand Jabouley in a statement yesterday.

 

“These measures are key to offsetting the impact of higher debt from the company’s acquisition of New Britain Palm Oil Ltd for RM6bil in 2015. We also anticipate that the company’s capability to generate cash could remain modest over the next 12-18 months, making debt reduction demanding,” he adds.

 

The downgrade comes as Sime Darby Bhd is in the midst of bulking up its pockets to pay up about RM17bil in debt from selling its assets.

 

S&P, however, says it may revise the outlook to stable if Sime Darby articulates and starts to implement a credible and comprehensive plan to reduce its net debt to about RM10bil by June 30, 2017.

 

Sime Darby, the world’s largest listed palm-oil producer by market value, is considering selling RM1.8bil worth of real estate assets in Australia and Singapore to lower its borrowings.

 

President and group chief executive Tan Sri Mohd Bakke Salleh expects the completion of the asset monetisation plan by the end of March. The monetisation programme would include assets such as commercial and industrial properties.

 

He says the company had identified 13 assets in Australia and three in Singapore for the planned asset monetisation.

 

Bakke says the company had a target to reduce the gearing level to 0.54 times by the end of the financial year ending June 30 from 0.61 times as at end-2015 through asset monetisation and an RM3bil perpetual sukuk programme.

 

The speed of the debt rationalisation is important as S&P says the amount of debt it needs to reduce is large.

 

“Sime Darby needs to reduce its debt by about RM7bil by the end of fiscal 2017 (year ending June) under our assumption of ebitda of close to RM5bil in that year, for its debt-to-ebitda ratio to converge to about 2.5 times, our rating threshold,” it said.

 

Another hindrance is Sime Darby’s cashflow. S&P says Sime Darby’s weaker operating performance makes de-leveraging harder because cash flows from operations are not enough to cover capital expenditures and cash dividends.

 

Sime Darby’s operating cash flows of less than RM500mil in the period were low compared to S&P’s forecast of RM2.5bil for the year.

 

In addition, it points out that a substantial part of the company’s debt is denominated in foreign currency.

 

“We estimate that the ringgit’s depreciation against the US dollar has increased the company’s absolute debt figure by about RM1.5bil,” it says.

 

Sime Darby’s reported Ebitda of RM1.8bil for the first two quarters of fiscal 2016 represented only about 40% of S&P’s full-year expectations.

 

For the second quarter ended Dec 31, 2015, Sime Darby reported a 38% decline in net profit to RM273.3mil from RM437.4mil in the same quarter previously due to lower crude palm oil (CPO) prices, while lower coal prices had hit its industrial unit’s profitability.

 

Revenue for the quarter, however, was up 10% to RM11.82bil from RM10.74bil previously.

 

Cumulatively, for the first half of financial year ending June 30, 2016 (FY16), Sime Darby’s earnings fell 35.8% to RM601.7mil from RM938.1mil a year ago. Its revenue for the period was higher at RM22bil from RM20.9bil.

 

Besides sweating its assets, Sime Darby had also planned a RM3bil perpetual sukuk, where the firm had made a lodgement to the Securities Commission on Jan 29.

 

“The first issuance would depend on the market and also on the credit rating,” Sime Darby’s chief financial officer Datuk Tong Poh Keow said recently.

 

It will bear watching what impact the downgrade on Sime’s ratings by S&P will have on the rating of its perpetual debt.

 

Earlier, Malaysian Rating Corp Bhd (MARC) accorded a preliminary AA-IS rating with a “negative” outlook on Sime Darby’s proposed RM3bil perpetual subordinated Sukuk programme.

 

The rating house says the “negative” outlook was consistent with its revised outlook on Sime Darby’s existing RM500mil Islamic Commercial Paper/Islamic Medium-Term Note (ICP/IMTN) programme to “negative” from “stable”.

 

The “negative” outlook revision, it said, reflected the “slower-than-expected” measures taken to deal with the group’s increased borrowings, following the debt-funded RM6bil acquisition of New Britain Palm Oil Ltd in March last year.

 

Despite the negative ratings, analysts expect Sime Darby to deliver a stronger second half mainly from its plantation and property divisions, especially in the final quarter where results typically peak.

 

From the said asset monetisation, analysts expect this exercise to potentially bring in after-tax disposal gains of RM200mil to RM300mil, adding that its property division will be a growth driver for the company in the coming years.