CORPORATES JANUARY 14, 2013 Table of Contents: SUMMARY 1 CORPORATE PROFILE 2 BUSINESS SEGMENTS 2 DETAILED RATING RATIONALE 4 PEER COMPARISON 8 RATING OUTLOOK 10 MOODY’S RELATED RESEARCH 11 APPENDIX 1 – HISTORICAL ADJUSTED FINANCIAL METRICS OF SIME DARBY 12 Analyst Contacts: SINGAPORE +65.6398.8300 Alan Greene +65.6398.8318 Vice President – Senior Credit Officer [email protected]Dylan Yeo +65.6398.8317 Associate Analyst [email protected]Philipp Lotter +65.6398.8335 Managing Director – Corporate Finance [email protected]Sime Darby Berhad Malaysia Summary » On January 11, 2013, we assigned a senior unsecured issuer rating of A3 to diversified Malaysian conglomerate Sime Darby Berhad (Sime Darby) with a stable outlook. We also assigned an A3/stable rating to the US$1.5 billion Shariah-compliant certificate issuance programme of Sime Darby Global, with Sime Darby as the obligor. » Market-leading position in palm oil plantation business underpins strong profit and cash flow. Sime Darby is the largest palm oil producer in the world with long- established operations in the key palm oil-producing countries of Malaysia and Indonesia. The division accounted for 53% of operating profit in fiscal year ending 30 June 2012 , but this high exposure comes with associated crude palm oil (CPO) price risks. The plantation business is the anchor of Sime Darby’s ratings. » Two other core divisions offer earnings diversity, but subject to single-supplier risk. Sime Darby’s industrial business, which supplies heavy equipment primarily from Caterpillar, and its motor business, a mix of car assembly, distribution and dealerships, account for roughly a third of group profits. While offering earnings diversity from its plantations business, both are subject to single-supplier risks. » Geographical diversification of revenues well balanced, but profits skewed towards Malaysia. Malaysia, Australasia and China account for 69% of the group’s fiscal 2011- 12 revenues. However, profits are geographically skewed, with Malaysia accounting for 53% of EBIT, largely coming from the plantation and property divisions. » Strong systemic support likely, if needed. We deem support from Sime Darby’s key shareholders -- government-linked Permodalan Nasional Berhad (unrated) and Employee Provident Fund (unrated) -- to be strong, given the group’s importance to the Malaysian economy and its savings programs. » Credit metrics set to weaken as five-year expansion plan calls for higher leverage. We expect credit metrics to moderate as the company embarks on a strategic plan to grow its business lines albeit with some flexibility in the investment plans. » Weak liquidity partially mitigated by very supportive domestic banking system. The expansion plan entails a high level of capex that will likely result in negative free cash flow over the next two years. Sime Darby is also fairly reliant on short-term financing (about RM3 billion). In addition, it has significant debt maturities of RM2.7 billion in the next 12 months (part of which is expected to be refinanced by its proposed bond issuance of US$1 billion), though it benefits from a very supportive domestic banking system.
Transcript
NEW ISSUER REPORT
CORPORATES JANUARY 14, 2013
Table of Contents:
SUMMARY 1 CORPORATE PROFILE 2 BUSINESS SEGMENTS 2 DETAILED RATING RATIONALE 4 PEER COMPARISON 8 RATING OUTLOOK 10 MOODY’S RELATED RESEARCH 11 APPENDIX 1 – HISTORICAL ADJUSTED FINANCIAL METRICS OF SIME DARBY 12
Analyst Contacts:
SINGAPORE +65.6398.8300
Alan Greene +65.6398.8318 Vice President – Senior Credit Officer [email protected]
Philipp Lotter +65.6398.8335 Managing Director – Corporate Finance [email protected]
Sime Darby Berhad Malaysia
Summary
» On January 11, 2013, we assigned a senior unsecured issuer rating of A3 to diversified Malaysian conglomerate Sime Darby Berhad (Sime Darby) with a stable outlook. We also assigned an A3/stable rating to the US$1.5 billion Shariah-compliant certificate issuance programme of Sime Darby Global, with Sime Darby as the obligor.
» Market-leading position in palm oil plantation business underpins strong profit and cash flow. Sime Darby is the largest palm oil producer in the world with long-established operations in the key palm oil-producing countries of Malaysia and Indonesia. The division accounted for 53% of operating profit in fiscal year ending 30 June 2012 , but this high exposure comes with associated crude palm oil (CPO) price risks. The plantation business is the anchor of Sime Darby’s ratings.
» Two other core divisions offer earnings diversity, but subject to single-supplier risk. Sime Darby’s industrial business, which supplies heavy equipment primarily from Caterpillar, and its motor business, a mix of car assembly, distribution and dealerships, account for roughly a third of group profits. While offering earnings diversity from its plantations business, both are subject to single-supplier risks.
» Geographical diversification of revenues well balanced, but profits skewed towards Malaysia. Malaysia, Australasia and China account for 69% of the group’s fiscal 2011-12 revenues. However, profits are geographically skewed, with Malaysia accounting for 53% of EBIT, largely coming from the plantation and property divisions.
» Strong systemic support likely, if needed. We deem support from Sime Darby’s key shareholders -- government-linked Permodalan Nasional Berhad (unrated) and Employee Provident Fund (unrated) -- to be strong, given the group’s importance to the Malaysian economy and its savings programs.
» Credit metrics set to weaken as five-year expansion plan calls for higher leverage. We expect credit metrics to moderate as the company embarks on a strategic plan to grow its business lines albeit with some flexibility in the investment plans.
» Weak liquidity partially mitigated by very supportive domestic banking system. The expansion plan entails a high level of capex that will likely result in negative free cash flow over the next two years. Sime Darby is also fairly reliant on short-term financing (about RM3 billion). In addition, it has significant debt maturities of RM2.7 billion in the next 12 months (part of which is expected to be refinanced by its proposed bond issuance of US$1 billion), though it benefits from a very supportive domestic banking system.
Sime Darby is Malaysia’s largest listed conglomerate, with over 100,000 employees and businesses in six core areas: plantations, industrials, motors, property, energy & utilities and healthcare.
The company is 52.3% held by government-linked Permodalan Nasional Berhad (PNB) and the unit trusts managed by PNB, the largest fund management company in Malaysia charged with promoting share ownership among the Bumiputera, and 11.9% by Employees Provident Fund (EPF), the government-controlled agency that manages the compulsory savings plan and retirement planning for workers in Malaysia.1
As of 2 January 2013, Sime Darby had a market capitalization of RM56.8 billion (US$17.8 billion).
Business Segments
Sime Darby is involved in six key industries: plantations, industrials, motors, property, energy & utilities as well as healthcare. The first four divisions accounted for around 97% of fiscal 2011-12 revenue, while the latter two, alongside other businesses, contribute the remaining 3%.
EXHIBIT 1
FY2012 Revenue by Business Segments
Source: Company data
EXHIBIT 2
FY2012 Operating Profits by Business Segments
Source: Company data
Plantations
Sime Darby is one of the largest palm oil producers in the world, accounting for approximately 5% of global CPO output in 2011. It has the largest planted area among its peers, with 522,000 hectares of nucleus palm oil plantations and a remaining landbank of about 314,000 hectares as of 30 June 2012. It has a strong presence in Malaysia and Indonesia, the two main CPO-producing nations that account for 85% of the world’s production, and since 2011, it has planted over 5,000ha of oil palm in Liberia, realizing its plan to sustain long-term growth as land availability in Malaysia and Indonesia declines.
1 Shareholding structure as at 31 December 2012.
Plantations29.6%
Property4.4%
Industrial27.7%
Motors34.8%
Energy and utilities2.5%
Healthcare0.7%
Others0.3%
Plantations53.2%
Property7.1%
Industrial22.0%
Motors11.5%
Energy and utilities4.9%
Healthcare0.4%
Others0.8%
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EXHIBIT 3
Planted Area as at FY2012
Source: Company data
EXHIBIT 4
Remaining Land Bank as at FY2012
Source: Company data
Sime Darby’s upstream operations, which produced about 2.4 million tons of CPO in fiscal 2011-12, are well balanced by its downstream activities, with refining capacity of 2.8 million tons, crushing capacity of 300,000 tons, oleo-chemical capacity of 1.04 million tons and biodiesel capacity of 90,000 tons.
EXHIBIT 5
Breakdown of FY2012 Revenue from the Plantations Segment
Source: Company data
In fiscal year 2012-13, Sime Darby is expected to complete a new refinery in Pulau Laut, Indonesia, which will boost refining capacity by 825,000 million tons and tighten integration between upstream and downstream activities.
Industrial
The industrial segment is Sime Darby’s fastest-growing division and second-largest EBIT contributor. However, some 95% of Sime Darby’s revenue in the segment comes from the sales, service and rental of Caterpillar (CAT, A2/stable) construction, logging and mining equipment to the key markets in Queensland and Northern Territory, Australia and southeast China. Growth in this segment is largely tied to coal mining in Australia and China and construction in China, Malaysia and Singapore. Sime Darby is the world’s third-largest CAT dealer, based on 2011 volumes.
The other 5% of revenue comes primarily from the sale of power systems (Perkins) and specialist tractor units (Terberg) for port handling.
Motors
The third-largest EBIT contributor, the division comprises distributor and dealership operations across Malaysia, Singapore, Hong Kong, Macau and New Zealand and dealership franchises in Thailand, China and Australia.
The bulk of turnover (some 60%) is derived from the sales and servicing of BMW ((P)A2/Stable) products (including Mini & Rolls-Royce), while Hyundai (Baa1/Stable) contributes the next largest portion (7%) due in part to its assembly business in Malaysia. Other important marques are Ford (Baa3/Stable), Peugeot (Ba3/Negative) and Jaguar Land Rover (Ba3/Stable).
Property
The property division is mainly engaged in the building of Malaysian townships on ex-plantation land, with 95% of its revenues derived from the country. It is the largest township developer in Malaysia (based on landbank). In fiscal 2011-12, the segment accounted for 7.6% of group EBIT and 4.3% of revenue. Sime Darby aims to achieve an 80-20 EBIT split between domestic and foreign operations in the longer term. At the same time, Sime Darby is looking to increase its recurring property income such that the ratio of EBIT derived from investment property to that from development activities reaches 20:80 from the current 5:95.
To reduce risk as Sime Darby diversifies both geographically and into high rise and flagship mixed developments, the company is entering joint venture where appropriate. In September 2012, it was awarded the redevelopment contract of the Battersea Power Station site in London in a joint venture with SP Setia Berhad (40%) and Malaysia’s EPF (20%) at a cost of GBP400 million.
Energy & Utilities
The division accounted for 5.4% of fiscal 2011-12 EBIT and primarily comprises port operations and a water treatment facility in China’s Shandong province. The port business in China will be the focus for growth for E&U having sold its oil and gas engineering and contracting businesses in 2012.
Healthcare
The segment, which contributed 0.4% to EBIT and 0.7% to revenue last year, comprises hospitals in Malaysia aimed at both domestic patients and international health travellers. During 2012, Sime Darby completed two new hospitals (220-bed SDMC Ara Damansara and 300-bed Park City) to supplement its flagship Sime Darby Medical Centre (393 beds) at Subang Jaya and its Nursing and Health Sciences College.
Detailed Rating Rationale
Market-leading position in palm oil plantation business underpins group profit and cash flow
Sime Darby’s rating recognizes the strong cash flow generated by its core oil palm plantation business, which recorded about RM2.5 billion of operating cash flow per year in FY2011 and FY2012 and
accounted for 53% of group operating profit and 30% of revenue in fiscal 2011-12. Accordingly, this business forms the anchor of Sime Darby’s credit profile.
The largest listed palm oil producer in the world, Sime Darby has long-established operations in the key palm oil-producing nations of Malaysia and Indonesia. In addition, Sime Darby’s operations are well-balanced in terms of upstream output and downstream activities. Its crop yields are among the best in the industry, while it is also the leading producer of sustainable palm oil, with nearly all its estates RSPO certified..
Relative to other agribusinesses, the credit profile of palm oil is attractive given its position as the lowest-cost vegetable oil, its high resistance to pests and diseases and the relative consistency of output over a period of 10 to 15 years once the trees reach maturity.
However, Sime Darby’s heavy exposure to this business segment carries related CPO price risks. CPO prices can be volatile, although recent low prices have remained well above Sime Darby’s low cash costs of production ($316/ton for fiscal year 2011). Our rating is premised on CPO price being maintained above US$700/ton, and closer towards recent 5-year averages of around $880/ton, on a sustained basis. We remain comfortable with the long-term CPO outlook as demand and supply fundamentals remain intact.
EXHIBIT 6
Commodity Price Trends (US$ per ton)
Source:: CME Group, IMF
The industry is open to regulatory uncertainty given its importance to the leading producers – Indonesia and Malaysia, in terms of revenue – and to the leading consumers of cooking oil – India and China, with their own agrarian industries and food price concerns –and to governments with green fuel agendas which direct subsidies towards the production of biodiesel. However, regulatory risk is mitigated by Sime Darby’s asset spread, with 60% of its plantations located in Malaysia and 39% in Indonesia.
Furthermore, at a current average age of 14 years, we believe that Sime Darby will need to invest in new planting to maintain production over the coming years, while also expanding its plantations to new countries around the equatorial belt, such as Liberia.
Geographical diversification of revenues well balanced, but profits skewed towards Malaysia
The conglomerate’s revenues are well diversified, with Malaysia, Australasia and China accounting for 69% of fiscal 2011-12 revenues. By contrast, Sime Darby’s EBIT and the disposition of its non-current assets (NCA) are geographically skewed, with Malaysian-based operations representing 56% and 59% of total EBIT and NCA, respectively, during the same period.
EXHIBIT 7
FY2012 Revenue by Geographical Region
Source: Company data
EXHIBIT 8
FY2012 PBT by Geographic Region
Source: Company data
Industrial and Motor divisions offer earnings diversity but subject to single-supplier risk
Sime Darby’s industrial and Motor businesses, which accounted for 22% and 11% of EBIT respectively, in FY12, offer earnings diversity from its plantations business, as well as geographical diversity. Its industrial business primarily supplies heavy equipment to the coal mining and construction sectors, with a focus on Australasia and China, while Motors division is a blend of car assembly, distribution and dealerships with a focus on high end cars in China, Malaysia, Singapore and Hong Kong.
However, both these business segments are subject to significant single-supplier risks and depend heavily on supply relationships with Caterpillar and BMW, respectively, which are both subject to annual renewal. Given Sime Darby’s performance over many years, Moody’s views the risk of losing such distribution rights as slight, especially for Industrial where the structure supporting the relationship has been embedded over many years.
Over 70% of Industrial’s EBIT arises in Australasia where demand is closely linked to the coal mining sector. Several mining companies have slowed their mine development programmes in the light of weaker thermal coal prices in 2012 leading to order deferrals and a build-up of machinery inventory, with Moody’s expecting no recovery in the sector’s prospects in 2013.
By contrast, the consumer’s appetite for new cars across China and SE Asia remains strong, continuing the trend of revenue growth in Motors since the global financial crisis.
Malaysia30.8%
Indonesia5.7%
Singapore10.0%
China19.1%
Australasia24.0%
Other countries in South East Asia4.8%
Europe4.2%
Other countries1.5%
Malaysia53.2%
Indonesia16.9%
Singapore5.4%
Other countries in South East Asia0.7%
China6.1%
Australasia15.5%
Europe-1.8%
Other countries-0.4%
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Expectations of systemic support
Sime Darby’s rating also reflects the importance of Sime Darby to the Malaysian economy and its savings programs. Although we do not regard Sime Darby as a government-related issuer (GRI), we deem systemic support from Sime Darby’s key shareholders -- government-linked Permodalan Nasional Berhad (PNB) and Employee Provident Fund (EPF) -- to be strong.
We believe that there is strong pressure to maintain the long-term value of Sime Darby’s equity given that around one half of Malaysia’s population has an indirect interest in PNB’s unit trust investments in addition to the nation’s pension savings exposure to Sime Darby via EPF and Kumpulan Wang Persaraan (Diperbadankan), another shareholder.
Credit metrics set to deteriorate as five-year expansion plan calls for higher leverage
Sime Darby has embarked on a five-year plan to expand its businesses through both organic and inorganic growth. We expect to see weaker credit metrics in two to three years if the company rolls out its expansion as planned. However, we believe that there is a lot of flexibility in the group’s investment plans, depending on the quality, availability and timing of expansion opportunities and with management keeping an eye on CPO prices to ensure the group’s financial strength is broadly maintained.
We expect gross gearing to increase from the debt to capitalization level of 27% reported at June 2012, but with management keeping to its declared limit of maximum debt to equity of 60% (equivalent to a debt to capitalization level of 37.5%).
Currently, Sime Darby displays credit metrics that would support a moderately higher rating. However, Moody’s A3 rating provides Sime Darby with the required flexibility to execute its expansion programme, even under somewhat weaker CPO prices, while still maintaining its credit profile. We expect credit metrics to deteriorate in moderation, with adjusted debt/EBITDA expected to increase to over 2 times in the next two years, from 1.5 times in fiscal 2011-12.
The expansion plan entails a high level of capital expenditure that will likely result in negative free cash flow over the next two years, with the expansion only expected to materially boost operational cash flow from fiscal year 2015. Sime Darby is also fairly reliant on short-term financing (about RM3 billion) and it has significant debt maturities of RM2.7 billion in the next 12 months. However, the high level of short term debt is also a function of Sime Darby’s superior access to bank finance in Malaysia. We believe issuance of long term debt going forward will improve the group’s overall capital structure.
Sime Darby’s debt maturity profile as of 30 June 2012 is as follows:
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EXHIBIT 9
Debt Maturity Profile as of 30 June 2012 (RM’million)
Source:: Company data
Peer Comparison
Sime Darby’s A3 rating is positioned in line with two other Hong Kong-based conglomerates, Jardine Strategic Holdings Ltd (A3/Stable) and Swire Pacific Ltd (A3/Stable). The rating is stronger than IOI Corporation Berhad (Baa1/Negative), a Malaysian-based issuer that is also highly exposed to CPO price movement.
Jardine Strategic Holdings Limited (A3/Stable)
Jardine’s rating is notched down by one notch due to risk of structural subordination. Its underlying business profile is slightly stronger than Sime Darby.
Jardine’s operations are larger both in terms of revenue and EBITDA when compared to Sime Darby. It is supported by a wide range of businesses across Asia and, as a result, is better diversified across business activities. This reduces exposure to volatility in any single sector which contrasts against Sime Darby’s high exposure to CPO price movements.
Jardine’s business has a high revenue concentration from Indonesia (Baa3/Stable) through its 50.1% ownership in Astra (unrated). Astra, with operations predominantly in Indonesia, accounted for 40% of Jardine’s underlying profit in 1H 2012 and 60% of Jardine’s revenue in FY2011. Sime Darby, on the other hand, is highly dependent on its Malaysian operations.
Credit metrics of both Sime Darby and Jardine are expected to remain broadly similar, after factoring Sime Darby’s slight deterioration in the next two years as a result of its expansion plans.
Swire Pacific Limited (A3/Stable)
Swire Pacific has a weaker financial profile compared to Sime Darby and is smaller in size.
Similar to Sime Darby, Swire Pacific is highly dependent on a single segment – its property business, which accounts for 85% of operating profits in FY2011. The segment, however, benefits from strong recurring cash flow from its quality investment property portfolio in Hong Kong, Mainland China
and USA. We view recurring income from Swire Pacific’s property business as more predictable compared to Sime Darby’s plantations segment.
IOI Corporation Berhad (Baa1/Negative)
Both IOI and Sime Darby have high exposure to the CPO price movements due to significant contribution from their plantations businesses. In fiscal year 2011-12, 53% and 76% of Sime Darby and IOI’s respective operating profits were generated by CPO related activities. Both companies are also expected to invest heavily in their non-plantations segments in the next two to three years,
Sime Darby’s plantations operations are stronger than IOI due to the size of its upstream operations, where its planted area of about 522,000 hectares dwarves IOI’s plantation size of 158,000 hectares, as at June 2012.
Debt / Book Capitalization 29.0% 27.1% 20.1% 43.1%
FFO / Debt 46.0% 32.6% 15.6% 21.1%
RCF / Net Debt 47.6% 32.3% -1.4% 10.5%
Source: Moody’s MFM
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Rating Outlook
The rating outlook is stable, reflecting the group’s strong credit profile and our expectation that a more aggressive growth strategy, coupled with management’s commitment to a prudent financial policy, can be accommodated in the rating in the near to medium term.
What could change the rating up
Sime Darby’s rating could be upgraded if the group’s growth strategy is delivered in a conservative fashion, or if cash generation is particularly buoyed by CPO prices returning back to the high levels seen in early 2011, resulting in an early decline in net debt levels. Credit metrics supporting such an upgrade could include i) EBITDA/gross interest in excess of 9 times; ii) RCF/net debt improving to 30% to 35% and iii) debt/EBITDA under 2 times, all on a sustained basis.
What could change the rating down
The rating could be downgraded if Sime Darby’s growth strategy results in either management or the financial resources of the company being over-extended. A downgrade may also be triggered by CPO prices revisiting the low levels last seen in late 2008. Credit metrics that support a downgrade include i) EBITDA/gross interest falling below 6-7 times; ii) RCF/net debt falling below 25% and iii) debt/EBITDA greater than 2.4-2.6 times on a sustained basis.
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Moody’s Related Research
Sector Comment:
» Malaysia Reduces Palm Oil Tax, a Credit Positive for the Industry, October 2012 (146547)
Credit Opinions:
» Sime Darby Berhad (A3/Stable)
» Jardine Strategic Holdings Limited (A3/Stable)
» Swire Pacific Limited (A3/Stable)
» IOI Corporation (Baa1/Negative)
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients.
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