March 2, 2017 / 8:17 AM / in 9 months

Fitch Places Sime Darby's Ratings on RWN Due to Restructuring

(The following statement was released by the rating agency) SINGAPORE, March 02 (Fitch) Fitch Ratings-Singapore-26 January 2017: Fitch Ratings has placed the ratings of Malaysia-based conglomerate Sime Darby Berhad (Sime Darby, BBB+) on Rating Watch Negative (RWN). The action follows Sime Darby's announcement on 27 February 2017 that it will completely divest its stake in previously 100%-owned subsidiaries Sime Darby Plantations (SD Plantation) and Sime Darby Property (SD Property). This in turn follows its earlier announcement on 26 January that it intends to list SD Plantation and SD Property as pure plays. Based on the latest announcement, SD Plantation and SD Property will no longer remain subsidiaries of Sime Darby after their listing. As a result, Sime Darby's business profile will weaken considerably as the remaining businesses exhibit higher volatility and cyclicality compared with the plantation business. Sime Darby will also have a smaller scale and lower diversification post-divestment. The company is undertaking an internal debt restructuring to allocate debt optimally between the three entities - Sime Darby, SD Plantation and SD Property. We believe that the natural home for the MYR3bn perpetual sukuk programme and USD1.5bn sukuk programme (all BBB+) is with SD Plantation, as the underlying assets are plantation land and bearer plants. We consider SD Plantation to be the strongest of Sime Darby's divisions. If SD Plantation's leverage post-restructuring is in line with Sime Darby's current level of around 3x (net debt/EBITDA), we do not expect a significant impact to our rating of the USD1.5bn sukuk programme - assuming it is transferred to SD Plantation. However, the weaker business profile of Sime Darby - with mainly trading-related heavy equipment (industrial) and automotive (motor) dealership businesses - may result in a multi-notch ratings downgrade. The proposed transaction - debt restructuring and divestment - is conditional upon receipt of all relevant approvals. KEY RATING DRIVERS Smaller Scale, Less Diversification: Sime Darby's rating was based on its consolidated profile, and key rating drivers were its diversification and scale from operating across several business lines and geographies. Sime Darby's cash flows will be significantly reduced as a result of the divestments, and earnings volatility is likely to be higher. SD Plantation and SD Property together contributed around 70% of Sime Darby's consolidated EBITDA in the financial year ending June 2016 (FY16). Consolidated EBITDA declined by around 20% over the three-year period to FY16; however, the drop excluding the SD Plantation and SD Property units was more than 40%. Muted Business Outlook: Sime Darby's remaining major divisions include the Motors and Industrial divisions. Sime Darby enjoys robust market positions in its focus segments - Motors is the second-largest BMW dealer in the world, and Industrial is the third largest Caterpillar dealer in the world. However, recent financial performance has been weak, and the outlook remains muted relative to that of SD Plantation, due to strong crude palm oil (CPO) prices. Sime Darby's EBITDA (excluding SD Plantation and SD Property) declined by 18% in FY16, and 1HFY17 EBIT was also marginally lower yoy (-2%). The Industrial division's sales to the construction and mining sectors improved, but weak market conditions in the marine and shipyard sectors continued to hamper profitability. Motors' EBIT improved in 1HFY17, but earnings were weak in the key Singapore market. Strong Plantation Business: SD Plantation is the world's largest palm oil company in terms of planted acreage. It is also the world's largest certified sustainable palm oil (CSPO) producer, accounting for around 20% of the total global output. SD Plantation's acreage is spread across five countries, with around 50% in Malaysia and 35% in Indonesia. SD Plantation's scale, integrated operations, certified products and an efficient operating cost structure underpin its strong credit profile. Healthy CPO Prices: Malaysian free-on-board (FOB) spot prices for CPO have improved over the last year to an average of USD735/ton (t) so far in 2017 from around USD500/t at end-2015. The main reason for the price increase was severely reduced output due to El Nino-related dry weather conditions, in addition to robust demand. As a result, palm oil inventories contracted, as evident from Malaysian inventories in December 2016 being near their lowest levels over the last 10 years. We expect CPO prices to moderate over the course of 2017 as output rebounds - due to more favourable weather conditions - while the average price in 2017 should still be higher than the USD640/t in 2016. DERIVATION SUMMARY Sime Darby's business profile following the proposed transaction will resemble that of China Grand Automotive Services Co., Ltd (CGA, BB-/Stable). CGA's ratings are supported by its large operating scale and leading market position. The company is the largest auto dealership in China, with more than 600 outlets in 27 provinces, covering more than 50 brands. However, its high leverage constrains the ratings. CGA is larger in scale than Sime Darby (post restructuring), while Sime Darby is more diversified in terms of businesses (motors and industrial) as well as geography (China/Hong Kong, south-east Asia and Australasia). However, Sime Darby's leverage profile remains uncertain, hence the RWN. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - The proposed transaction is completed by FYE17. The company expects to complete the transaction within 2017. - Sime Darby transfers debt related to its MYR3bn perpetual sukuk programme and USD1.5bn sukuk programme to SD Plantation - Revenue growth of 3% each year for Sime Darby's remaining businesses from FY18 - Operating EBITDA margin of around 5% for Sime Darby's remaining businesses from FY18 RATING SENSITIVITIES The RWN will be resolved following the completion of Sime Darby's proposed transaction, after a review of its leverage profile and other credit metrics. The transaction is conditional upon receipt of all relevant approvals, and may take more than six months to be completed. FULL LIST OF RATING ACTIONS The following ratings of Sime Darby have been placed on RWN: -- Long-Term Foreign-Currency Issuer Default Ratings (IDR) of 'BBB+'; -- Long-Term Local-Currency IDR of 'BBB+'; -- Senior unsecured rating of 'BBB+'; -- Rating on USD1.5bnsukuk programme and issuance under the programme of 'BBB+' Contact: Primary Analyst Akash Gupta Associate Director +65 6796 7242 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Secondary Analyst Rufina Tam Associate Director +62 21 2988 6813 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Criteria for Rating Sukuk (pub. 16 Aug 2016) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016) here Additional Disclosures Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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