Sime Darby
Fitch rates Sime Darby Plantation and Sime Darby Berhad

Reaffirms SD Plantation’s BBB+ and assigns BB+ for SD Berhad

Kuala Lumpur, 27 November 2017 - Ahead of the listings of Sime Darby Plantation Berhad (SD Plantation) and Sime Darby Property Berhad on 30 November 2017, Fitch Ratings has assigned ratings for the two Sime Darby companies it assesses, namely Sime Darby Berhad (SD Berhad) and SD Plantation. 

Fitch Ratings has assigned SD Plantation a Long-Term Foreign Currency Issuer Default Rating (IDR) of ‘BBB+’ with Stable Outlook and a senior unsecured rating of ‘BBB+’. Fitch has also removed the Rating Watch Negative on the USD1.5 billion sukuk programme and the outstanding issuance under the programme, which were transferred to SD Plantation from SD Berhad in May 2017, and affirmed them at ‘BBB+’.

Meanwhile, SD Berhad was assigned a rating of ‘BB+’ from ‘BBB+’ for its Long-Term Foreign and Local Currency Issuer Default ratings. Fitch has noted that following the demerger of its property and plantation businesses, SD Berhad will be a smaller company focused on the automotive and industrial equipment sectors. However it must be noted that following a group wide debt restructuring exercise, as of September 2017, SD Berhad had a total debt of just RM2.8 billion, and a lower debt to equity ratio of 18 percent.

Fitch also downgraded SD Berhad’s senior unsecured rating to ‘BB+’ from ‘BBB+’. Simultaneously, the ratings have all been removed from Rating Watch Negative (RWN), which was in place since 2 March 2017.  

SD Plantation will be listed as a standalone entity on 30 November 2017. The company’s debt restructuring exercise, part of the process of demerging from SD Berhad, has been in line with Fitch’s expectations.
SD Plantation is the world’s largest producer of palm oil, and accounts for more than 20 percent of the global certified sustainable palm oil (CSPO) production. Ninety seven percent of the three million metric tonnes (MT) of palm oil it produces annually is certified by the Roundtable on Sustainable Palm Oil (RSPO).
According to the statement issued by Fitch: “The company has been focusing on deriving more value from its CSPO output through higher sales of physical oil, which could garner price premiums of up to USD15 per tonne on average over uncertified oil. While higher price realisation for the certified sustainable products more than offset certification and implementation costs currently, the net benefit to SD Plantation should improve with better access and more sales to higher-margin markets in Europe and the US”.
This rating by Fitch is an affirmation of the company’s efforts to become the preferred sustainable palm oil and fats specialist and a trusted customer solutions provider by focusing on differentiated, sustainable and traceable high value products, to serve its customers’ evolving needs. With this in mind, SD Plantation will be looking to explore and expand opportunities to increase its presence in other key geographical markets in Southeast Asia, the United States, Europe, Africa and the Middle East. Through these initiatives, SD Plantation targets for its downstream operations to contribute more than 20 percent of its Profit Before Interest and Tax (PBIT) within the next five years.
“This news has come at an opportune time and augurs well for the prospects of our business as we enter this next phase in our journey. SD Plantation has come very far, especially in the last 10 years. We are now equipped and ready to move ahead after the listing, to take the company to the next level,” said Tan Sri Dato’ Seri Mohd Bakke Salleh, Executive Deputy Chairman & Managing Director of Sime Darby Plantation.
Investors see Sime Darby Plantation as a well-diversified company and its scale and breadth help to mitigate risks from challenges such as extreme weather conditions and changes in regulations.
One of the main challenges faced by all palm oil companies is increased protectionism and fluctuating taxes, tariffs and levies in export markets. SD Plantation is in a unique position to mitigate such risks due to its presence in a number of producing and consuming countries and its ability to switch sale offerings between unrefined and refined products, and CSPO versus segregated CSPO, enabling it to hedge against any potential impact on revenues from specific markets.
“Global demand for edible oils is driven by the growing population, especially the middle class in key consumer markets, and increased food consumption. Thus, SD Plantation expects its market reach to grow even further over the next five years,” Mohd Bakke said. “While it is expected that China and India will continue to drive the demand for palm oil in food consumption, palm oil demand in other countries is also expected to grow. The demand in the United States, for instance, is projected to increase significantly subsequent to the ban on transfats in June 2018.”
From its current portfolio of global customers, SD Plantation is looking forward to extend its market reach beyond the five top consuming countries, namely, Malaysia, Indonesia, India, the European Union and China. These countries account for 53.2 percent of the global palm oil consumption or approximately 33.2 million MT in 2016.
To leverage on the steady growth in the demand for palm oil, SD Plantation will focus on operational excellence, expansion of its business presence in high-margin products covering the attractive mid and downstream markets, whilst strengthening its sustainability credentials.
“We are well aware that the key to fulfilling our aspirations ultimately lies in increasing yields and driving efficiency,” Mohd Bakke added. The Company is encouraged by its fresh fruit bunch (FFB) production for 1Q FY2018 which has improved to 2.70 million MT from 2.15 million MT in 1Q FY2017 as a result of focused efforts on the ground to improve operational performance. Underpinning SD Plantation’s efforts to increase yields is the accelerated replanting programme, where the company is targeting replanting rates of between 5-7 percent across Malaysia and Indonesia to improve its tree age profile to between 10-11 years.

Leveraging on this replanting exercise, SD Plantation will be looking to escalate its efforts further by implementing cost reduction exercises to augment the positive impacts of new and higher yielding planting materials, improved mechanisation and technology, as well as best agro-management practices.

Another unique selling proposition SD Plantation enjoys is its position as the world’s largest producer of traceable and segregated CSPO. For key customers in markets such as the United States and Europe, the company’s sustainability credentials play a critical role in attracting new demand. The ‘Sime Darby’ brand is widely recognised in the plantation sector.
“With more than 100 years of history in the plantation industry, we have built a strong and long standing customer base, many of whom have put their trust in the brand as a leader in plantation sustainability,” Mohd Bakke said.
SD Plantation is poised to serve the needs of customers in these markets and also to continue to build the reputation and strength of its brand in other emerging markets where sustainability is becoming an essential criteria.

Following the anticipated listings of its two subsidiaries, SD Berhad will be focused on its Motors and Industrial Divisions, and plans to reinforce its position as the market leader in the automotive and heavy equipment sectors in the Asia Pacific region.
“We are in an excellent position to capitalise on our core strengths, mainly, our strong balance sheet, healthy relationships with our principals, our geographical reach and our leadership position in both sectors,” noted Jeffri Salim Davidson, SD Berhad’s Group Chief Executive Officer.
After the groupwide debt restructuring exercise which was completed in September 2017, SD Berhad has a debt to equity ratio of just 18 percent. Of its total debt of RM2.8 billion, RM547 million is long term and the rest is short term. The company recorded strong operating cash flow of RM1.5 billion in FY2017. 
In revising SD Berhad’s rating, Fitch did note however, that it expects Sime Darby Motors Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) to continue to grow steadily, and that higher commodity prices will drive a recovery for Sime Darby Industrial. 
Sime Darby Motors, which is the world’s second largest BMW dealer, is a significant player in every market it operates within. Its focus on the luxury brands segment of the market is a strategic move aimed at mitigating the impact of economic cycles that typically have greater impact in mass market segments. 
Fitch also noted that the assembly operations have higher margins than the retail and distribution operations. The number of vehicles assembled by Sime Darby Motors increased by 19 percent in the financial year ended June 2017. 
“We are seeking to expand our assembly operations by increasing the number of models and volume of cars built, as well as adding the assembly of engines,” Jeffri explained.
Sime Darby Industrial, one of the largest and oldest Caterpillar dealers in the world, commands a leading position in most of the markets it operates within. It has diversified sectoral exposure across mining, construction, forestry, marine and energy. Sime Darby Industrial is poised to tap on the turnaround in global commodities prices and the growth in the construction sector. The early indications of this are apparent in the 64 percent year-on-year (YoY) increase in Sime Darby Industrial’s order book as at 30 September 2017 to RM2.38 billion.  Sime Darby Industrial’s PBIT increased by 384 percent YoY for 1Q FY2018, mainly due to the gain on disposal of properties in Australia of RM156 million. Excluding this gain, the division’s PBIT was 78 percent higher than the previous corresponding quarter. Its Australasian operations enjoyed improved contributions from new equipment sales and realised increased margins from product support sales in the recent quarter. In China, Sime Darby Industrial had higher equipment deliveries and achieved lower operating costs in the mining and construction sectors. 

“The new Sime Darby Berhad is focused on its core trading model with a leaner and more agile structure. We are well-positioned for the commodity price upcycle for the Industrial Division and have rationalised our cost structure by implementing business processing systems to enhance efficiency and reduce overheads. In the Motors Division, we will benefit from having a well-balanced portfolio of marques from mass market to super luxury. In addition, we span the value chain from assembly to distribution retail and after-sales,” Jeffri added.

About Sime Darby 
Sime Darby is a Malaysia-based diversified multinational involved in key growth sectors, namely, plantation, industrial equipment, motors, property and logistics. Founded in 1910, its business divisions seek to create positive benefits in the economy, environment and society where it has a presence. With a workforce of over 120,000 employees in 25 countries and 4 territories, Sime Darby is committed to building a sustainable future for all its stakeholders. It is one of the largest companies on Bursa Malaysia with a market capitalisation of RM60.8 billion (USD14.7 billion) as at 24 November 2017.

For further information, please contact:

Leela Barrock
Group Head – Communications
Sime Darby Berhad
Tel: 03-2711 1676 (Off), 019-213 2236 (HP)