DRAFT

CREDIT ANALYSIS
CREDIT ANALYSIS

KDN NO: PP9914/09/2010(025456)
CD 52249

MALAYSIAN RATING CORPORATION BERHAD
(Company No.: 364803 V)

SIME DARBY BERHAD
2009 New Rating and Annual Review
Preliminary Rating
Date
September 2009

Rating Action
Assigned

Rating
(i) AAAID
(ii) MARC-1ID /AAAID

Issues

(i) RM4,500 million Islamic Medium Term Notes
Programme (IMTN Programme)
(ii) RM500 million Islamic Commercial Papers / Islamic
Medium Term Notes Programme (ICP/IMTN
Programme) with a combined limit of RM4,500 million

Tenure

(i)
(ii)

20 years
7 years

Issue Date

To be determined

Facility Agent/
Lead Arranger

Maybank Investment Bank Berhad

Trustee

Mayban Trustees Berhad

Existing Ratings
Date
September 2009

Rating Action
Affirmed

Rating
(iii) MARC-1ID /AAAID
(iv) MARC-1ID

Outlook
Stable

Issues

Conglomerate

Corporate Debt

Outlook
Stable

(iii) RM1,500 million Murabahah Commercial Papers /
Murabahah Medium Term Notes Programme
(iv) RM150 million Underwritten Murabahah Commercial
Papers Facility

Contact Analysts

Katherine Hee Cheui May
Nisha Joan Fernandez
Elea Nor Zainal
Rajan Paramesran

hcmay@marc.com.my nisha@marc.com.my elea@marc.com.my rajan@marc.com.my (603) 2092 5398

Publication Date: October 20, 2009

44

This credit analysis report is published in relation to the press announcement made on September 30, 2009.

M ALAYSIAN RATING CORPORATION BERHAD

CREDIT ANALYSIS
CORPORATE DEBT / CONGLOMERATE
2009 New Rating and Annual Review

SIME DARBY BERHAD
Strengths
•
Good revenue diversification and stable base for future earnings;
•
Favourable financial flexibility and liquidity; and
•
Increased operational scale in its oil palm plantation and property development businesses.
Challenges/Risks
•
Pressure on near-term credit protection measures from growth-related spending and subdued growth prospects; and
•
Exposure to commodity price volatility and industry cyclicality.
Rationale
MARC has assigned preliminary ratings of AAAID and MARC-1ID/AAAID to Sime Darby
Berhad’s (Sime Darby) proposed Islamic debt programmes comprising RM4.5 billion Islamic Medium
Term Notes (IMTN) and RM500 million Islamic Commercial Papers/Islamic Medium Term Notes
(ICP/IMTN) respectively with a combined limit of RM4.5 billion. The ratings carry a stable outlook.
The rating actions incorporate the conglomerate’s reduced integration risk after almost two years of operation since its large-scale merger in November 2007, the current sizeable scale of its oil palm plantation and property development operations, its strong market positions in its automotive and industrial equipment business lines and sound financial profile. Although its unaudited financial results for the financial year ended June 30, 2009 (FY2009) was down substantially from FY2008, the ratings reflect
MARC’s expectations that Sime Darby’s consolidated balance sheet and cash flow coverage will become progressively stronger as the operating climate in its core business lines improves over the intermediate term. The ratings also reflect Sime Darby’s favourable financial flexibility and the strong liquidity it has consistently maintained relative to leverage.
The proceeds from the new issuance will potentially be partly utilised for the refinancing of the outstanding RM1.0 billion Murabahah Commercial Papers/Murabahah Medium Term Notes (MCP/MMTN
Programme) currently rated MARC-1ID / AAAID and RM150 million Murabahah Commercial Papers
(MCP) currently rated MARC-1ID. The balance of the proceeds is expected to be utilised for group’s working capital requirements and general corporate purposes, future investments and/or capital expenditure. Sime Darby is the world’s largest oil palm plantation group and Malaysia’s largest property developer by landbank. Sime Darby has maintained strong niche-market leading positions in the industrial, motor, energy and utilities sectors. It is the third largest automobile dealer group globally for German automaker, BMW, and one of the world’s largest dealers for heavy equipment maker, US-based
Caterpillar Inc. The geographical diversity of Sime Darby’s operations and the range of customers and industries continue to mitigate its exposure to downturns in specific sectors. Nevertheless, the group’s financial performance has been impacted by the current economic crisis.

MARC Analysis

Sime Darby Berhad

1

For FY2009, the group’s revenue and pre-tax profit dropped by 9.0% and 41.0% to RM31.0 billion
(FY2008: RM34.0 billion) and RM3.1 billion (FY2008: RM5.2 billion), respectively. The lower result was mainly due to weaker performance of the plantation division as a result of lower average crude palm oil
(CPO) prices. However, despite lower CPO and palm kernel prices, Sime Darby’s net profit after tax and minority interests of RM2.3 billion for FY2009 exceeded the group’s revised Key Performance Indicator
(KPI) of RM1.9 billion by 20%, from the earlier announced KPI of RM3.7 billion, mainly due to improvements in industrial, property and motor divisions amid a lower global demand. The plantation division contributed more than half of the group’s profit before interest and tax (PBIT), as compared to its FY2008’s contribution of 70.4% attributed to the lower CPO prices, apart from lower production as a result of lower fresh fruit bunches (FFB) yield. The industrial and property divisions were the second and third largest contributors of PBIT, respectively in FY2009.
The group’s capital structure continues to be characterised by a low level of net debt, with a consolidated debt-to-equity ratio (DE) of 0.25 times as of June 30, 2009. With full drawdown of the proposed combined limit of RM4.5 billion Islamic debt programmes and retirement of its outstanding RM1.0 billion
MCP/MMTN Programme and RM150 million MCP, the group’s DE will increase to 0.41 times on a pro forma basis. However, the group intends to draw down the Islamic programme progressively. While its capital spending requirements of RM7.0 billion over the next two to three years are expected to exceed annual operating cash flow in FY2010 and FY2011, Sime Darby would need to maintain its debt structure and liquidity within the agency’s tolerance range in order to retain the current ratings. The group would need to keep its DE at below 0.50 times and to maintain a satisfactory liquidity cushion in the form of cash and cash equivalents to retain the current ratings.
Sime Darby’s cash and cash equivalents had risen to RM3.3 billion as of June 30, 2009 against near-term debt maturities and short-term borrowings of RM3.6 billion (including the outstanding RM1.0 billion
MCP/MMTN Programme and RM150.0 million MCP) which Sime Darby plans to refinance with proceeds from the issuance of notes under the proposed Islamic debt programme. MARC believes that the proposed facilities will augment Sime Darby’s financial flexibility by allowing it to proactively addressing its debt maturities.
The stable ratings outlook incorporate some weakening of Sime Darby’s near-term credit measures from historical levels given the lack of free cash flow generation expected. However, if business conditions and an operating performance prove to be significantly below MARC’s expectations, this could pressure the current ratings or outlook. One of the main challenges Sime Darby will foreseeably face is to receive strong dividends flow from its subsidiaries amid slower growth prospects.

Exhibit 1: Financial Highlights
FYE 30 June
Revenue (RM in million)
Pre-tax profit (RM in million)
Operating profit margin (%)
CFO interest coverage (times)
Debt-to-equity (times)
Shareholders’ funds (RM in million)

FY2009*
31,014
3,072
10.16
2.93
0.25
22,006

2008
34,045
5,206
15.09
13.27
0.22
22,205

2007
28,230
3,573
12.72
9.68
0.31
19,554

*Unaudited results
CFO – Cash flow generated from operations after tax but before interest
Note: Shareholders’ funds is inclusive of Minority Interest

MARC Analysis

Sime Darby Berhad

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BUSINESS DESCRIPTION
Company background
Sime Darby Berhad is the merged entity of three Malaysian corporations: Kumpulan Sime Darby,
Kumpulan Guthrie Berhad (Guthrie) and Golden Hope Plantations Berhad (Golden Hope). The merger exercise, announced in November 2006 and completed in November 2007, was by way of issuance of
Redeemable Convertible Preference Shares (RCPS A) in Sime Darby to the shareholders of the acquired companies on the basis of one RCPS A to one ordinary share of Sime Darby or cash payment of RM5.25 per RCPS A on the expiry date. A total of 5.95 billion shares in Sime Darby were issued and RM401.01 million in cash was paid.
The merger has fortified Sime Darby’s position in key sectors of the domestic economy: plantation, property, motors, industrial, energy and utilities. Non-core businesses are placed under healthcare and others. The merger has resulted in Sime Darby emerging as the world’s leading oil palm plantation group with significant presence in downstream palm oil activities; and a dominant player in property development with sizeable landbank in the country. In the motor division, Sime Darby holds distributorship and dealership of well known motor brands such as BMW and in the industrial division, it holds the Caterpillar rights in 12 countries.
Despite the benefits accrued from the enlarged size, the challenges facing Sime Darby is avoiding diseconomies of scale to maximise value throughout the group, particularly in improving yields and cost efficiency in the plantation division where, prior to the merger, Kumpulan Sime Darby, Golden Hope and
Guthrie were significant players in the plantation sector.
A breakdown of revenue and profit before interest and tax (PBIT) for the businesses is illustrated below:
Exhibit 2: Segment Results for Unaudited FY2009 and FY2008
FY2009*(RM million)
Revenue
%
PBIT
Segment
Plantation
10,658
34
1,719
Industrial
7,870
25
862
Motors
7,510
24
178
Property
1,408
4
462
Energy and Utilities
2,939
10
41
General Trading, Services & Others
629
2
10

%
52
26
5
14
1