We assess Sime Darby's liquidity as "adequate," as defined in our criteria. We expect the group's sources of liquidity to exceed uses by more than 1.2x in fiscals 2013 and 2014. Our liquidity assessment is based on the following factors and assumptions:
-- Key sources of liquidity include existing cash of about MYR5 billion and annual generation of funds from operations of about MYR5 billion a year until fiscal 2015.
-- Contracted asset sales of MYR1.1 billion (including oil and gas assets) will contribute to cash flows in fiscal 2013.
-- Key uses of liquidity are capex of about MYR5 billion in fiscal 2013 and an average of MYR4.5 billion in fiscals 2014 and 2015.
-- Contractual debt maturities will be about MYR1.5 billion during the second half of fiscal 2013. Debt maturities should be negligible in 2014.
-- Investments in working capital are likely to be about MYR2.0 billion a year in fiscals 2013 and 2014.
-- We expect dividend payouts of about 50% of net profit, or about MYR2.0 billion a year. This is consistent with the group's financial policy.
-- In our base-case scenario, we expect the group to increase its borrowings by about MYR4.5 billion in fiscal 2013 to fund its working capital, capex, and dividends while maintaining MYR5.0 billion in cash.
-- However, the company has the ability to reduce its capital investments if its profitability is weaker than expected and to moderate the increase in leverage.
-- The group has committed credit facilities of about MYR1.7 billion and the flexibility to tap its ringgit medium-term notes (MTN) program, which will likely be its borrowing sources.
We believe Sime Darby has a good standing in the capital markets and good relationships with lenders. This reflects its long operating record and consistent financial management.
Sime Darby needs to comply with certain financial covenants in its bank facilities and ringgit MTN program. These covenants are related to borrowings versus shareholder funds. The group has maintained comfortable headroom for all its covenants. As the covenants are not related to profitability or cash flow generation, we expect Sime Darby to have good headroom to comply with the covenants in our base-case scenario.
The stable outlook reflects our expectation that Sime Darby's diversified businesses will generate strong operating cash flows. This should offset likely lower earnings and moderately higher leverage due to large debt-funded capex. The outlook also reflects our expectation that the group will maintain a prudent approach to investments and capex. We expect Sime Darby's debt-to-capital ratio to hover about 35% in fiscals 2014 and 2015. This peak gearing is still in line with our assessment of a modest financial risk profile, and compares with about 28% in fiscal 2012.
We may lower the rating by one notch if: (1) crude palm oil prices deteriorate significantly from levels in 2012 and remain below MYR2,000 per metric ton; and (2) the profitability of Sime Darby's mining equipment and motors businesses deteriorates, such that its borrowings will have increased more than we expect due to large capital spending. A debt-to-capital ratio of more than 35% and a debt-to-EBITDA ratio of more than 3x sustained for more than 18 months would indicate that the financial risk profile has deteriorated. We may also downgrade Sime Darby if the group's free cash flows (operating cash flow minus capex) show no sign of returning to positive by the end of fiscal 2014.
The potential upside to the rating is limited for the next 24 months, given our expectation of lower profitability and large debt-funded capex. We could upgrade Sime Darby if the group consistently executes its strategy and investment plan, improves its business diversity, and reduces its leverage (debt-to-EBITDA) below 1.5x for a sustainable period.
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008