TEXT-Fitch rates Malaysia's Sime Darby 'A';outlook stable

Fri Jan 11, 2013 8:02am EST

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Jan 11 (Reuters) - (The following statement was released by the rating agency)

Jan 11 - Fitch Ratings has assigned Malaysia-based Sime Darby Berhad (Sime Darby) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of 'A'. The Outlook is Stable. A Long-term foreign currency senior unsecured rating of 'A' has also been assigned.

Sime Darby's ratings reflect its strong plantations business, its large size, a diversified business portfolio and its conservative financial leverage.

Sime Darby is the world's largest listed palm oil company, as measured by planted palm hectares and fresh fruit bunch production, and accounts for approximately 5% of the world's crude palm oil (CPO) output. Its fully integrated model, together with its efficient operating cost structure, has enabled the company to maintain high levels of profitability through market cycles. Palm oil's efficient and sustainable characteristics support the industry's underlying fundamentals.

Sime Darby is diversified across six core businesses and has moderate geographic reach. The core businesses are plantations (predominantly CPO and some rubber), property, industrial , motors, energy and utilities and healthcare. The plantation business is the largest contributor to profits, accounting for approximately 52% of FY12 consolidated EBITDA. While some of the businesses exhibit higher volatility and cyclicality compared with the plantation business, each business enjoys a solid market position supported by a strong footprint in its respective markets.

Sime Darby is continuously assessing and rebalancing its portfolio mix, including up-scaling the value of its landbank and increasing facilities and capacity for its industrial division, motors, utilities and healthcare businesses. Nonetheless, Fitch expects that the plantation business will continue to be the dominant cash flow contributor over the medium term.

Fitch takes comfort from Sime Darby's efforts to strengthen internal controls, particularly in risk management. However, while the agency believes that Sime Darby has the requisite independence to evaluate investment and divestment decisions solely on commercial considerations, the risk of state intervention is moderate. This is because Permodalan Nasional Berhad (PNB), the sovereign-linked fund management company/unit trust, and unit trusts managed by PNB, with an effective interest of 52.3%, is the largest shareholder and has strong oversight with five board nominees.

Sime Darby's financial leverage is conservative with an adjusted net debt/fund flow from operations (FFO) as of 30 June 2012 of 1.3x. Nevertheless, Sime Darby has a high dividend payout, which to some extent is a function of its shareholding structure that renders dividend payouts obligatory. This has the potential to constrain financial flexibility, but Fitch considers such risk to be low at the current juncture given the company's strong liquidity. It has MYR4.6bn cash balance (approximately 45.8% of outstanding debt as of 30 June 2012), sizable unutilised committed bank lines of credit and a well spread-out debt maturity profile.

The Stable Outlook reflects Fitch's view of the supportive industry fundamentals of Sime Darby's plantation business and the politically and economically stable markets in which it operates. Sime Darby should, therefore, be able to maintain a sound financial profile with a higher but still acceptable leverage, despite its planned growth trajectory in the next 18 to 24 months.

What could trigger a rating action?

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- A downgrade in Malaysia's Country Ceiling 'A', which would result in a corresponding downgrade in Sime Darby's Long-Term Foreign Currency IDR. Sime Darby's Long-Term Foreign Currency IDR is currently at the same level as the Malaysian Country Ceiling

- An increase in the role of the Malaysian sovereign or related entities in Sime Darby's decision-making process will result in the Long-Term Foreign and Local Currency IDRs being downgraded and placed on a par with the sovereign rating, which is currently 'A-'

- A sustained increase in financial leverage (adjusted net debt/ FFO) to over 1.75x

No positive rating action is expected in the medium term due to the cyclical nature of SIME's key businesses.

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