KUALA LUMPUR: Malaysian Rating Corp Bhd (MARC) has affirmed Sime Darby Plantation Bhd’s (SD Plantation) corporate credit rating at AAA, and accordingly affirmed its perpetual subordinated sukuk programme of up to RM3.0 billion at AAIS.
In a statement today, MARC said the ratings outlook was stable, noting that SD Plantation benefitted from a one-notch rating uplift for implicit support from major shareholder Permodalan Nasional Bhd (PNB).
“The affirmed corporate credit rating is driven by SD Plantation’s sizeable and geographically diversified oil palm plantations that support a strong cash flow generating ability to provide a healthy buffer against its financial obligations,” it said.
The rating agency said SD Plantation’s rating was moderated by susceptibility of earnings to crude palm oil (CPO) price movement, although its vertically-integrated business structure provides some mitigation against the impact of CPO price volatility.
“The stable rating outlook reflects MARC’s expectations that the CPO price level would remain above RM2,000 per tonne over the near term.
“The group’s productivity will also remain supportive of its ability to balance its borrowing levels with capex requirements for its replanting and new planting activities,” it added.
With a total plantation land bank of about 1.0 million ha, MARC said SD Plantation’s total cultivated oil palm plantation land stood at around 603,000 ha, making the group one of the world’s largest palm oil producers.
It said SD Plantation production accounted for about four per cent of global CPO production at end-2017.
Having 98 per cent of its palm oil with certified sustainable palm oil (CSPO), MARC said SD Plantation would retain a competitive advantage as rising concerns on sustainable practices weigh on the palm oil industry.
“SD Plantation’s geographical diversity and the wide spectrum of its midstream and downstream operations mitigate key palm oil industry risks namely tariff imposition by local governments and weather conditions that affect fresh fruit bunch (FFB) yields,” it said.
For the year ended June 30, 2018, SD Plantation FFB production rose five per cent year-on-year (yoy) to 10.2 million tonnes on improved weather conditions in most of its geographies, with upstream Malaysian operations recovering most with a 10 per cent variance yoy to 5.82 million tonnes.
“The overall improvement in FFB production helped to partly offset the 11 per cent YoY decline in its realised CPO price of RM2,546 per tonne. For FY2018, recurring profit before interest and tax (PBIT) declined 9.0 per cent yoy to RM2.0 billion on the back of a 3.0 per cent yoy decline in revenue to RM14.4 billion.”
MARC said SD Plantation’s cash flow from operations (CFO) had stood at a healthy RM2.7 billion, contributing to CFO interest cover of 12.2 times on lower interest costs in line with the decline in group borrowings to RM7.6 billion from about RM8.9 billion in the previous corresponding year.
MARC expects SD Plantation’s annual cash generation to remain supportive of the group’s capital expenditure (capex) programme of about RM1.7 billion annually, which includes an estimated RM800 million annually for replanting activities over the next three years.
The ongoing capex spending that covers replanting of about 5.0 per cent of the total planted area annually is expected to reduce its overall average plantation age to 10 years by 2025.
The rating agency also expects SD Plantation to continue maintaining discipline on dividend payout in line with its dividend payout policy of at least 50 per cent of its net profits.