Sime Plantation ratings affirmed

Outlook seen stable with Fitch also positive on planter’s commitment to sustainable palm oil

KUALA LUMPUR: Fitch Ratings has affirmed palm-oil producer Sime Darby Plantation Bhd at BBB+ with a stable outlook while it is also positive on the latter’s commitment to sustainable palm oil.

The rating agency, in a statement, has affirmed the long-term foreign currency issuer default rating (IDR) at “BBB+” with a stable outlook and its senior unsecured rating at ‘BBB+’.

Fitch also affirmed Sime Plantation’s US$1.5bil sukuk programme and the outstanding issuance under the programme at ‘BBB+’.

It said the deleveraging.

Funds from operations (FFO) adjusted net leverage fell to 3.2 times by the end of the financial year to June 2018 (FY18) from 3.7 times in FY17.

This was better than Fitch’s expectation of 3.5 times due to the company fetching higher prices for the land it sold than it had forecast.

“Fitch expects Sime Plantation to dispose of more land parcels over the next 24 months, supporting our deleveraging expectation towards FFO adjusted net leverage of company was commited to below 2.5 times by FY20 (FY19: three times; FY20: 2.4 times),” it said.

Fitch thinks Sime Plantation’s commitment to sustainable palm oil will allow the company greater access to developed markets where demand is more stable and there is a premium attached to certified palm-oil products.

SDP is the world’s largest certified palm-oil producer, and therefore benefits from increasing awareness of sustainable palm oil and the strict adherence required from multinationals or from customers from developed countries.

The European market is phasing out the use of palm oil in biodiesel and committing to 100% certified sustainable palm oil usage by 2020.

However, a delay in land sales or values lower than Fitch’s assumptions may slow the deleveraging process although the risk is counterbalanced by Sime Plantation’s commitment to deleverage and the other measures it can use to manage its capital structure, including asset disposals and a dividend reinvestment plan.

Sime Plantation’s rating reflects its position as the world’s largest palm-oil producer by planted area, diversified plantation locations and operating integration, which allows optimum profit retention.

Sime Plantation reported total planted area of around 600,000ha as of June 30 2018 and annual fresh fruit bunch (FFB) production of over 10 million tonnes from its operation in Malaysia, Indonesia, Papua New Guinea, Solomon Islands and Liberia.

More than 70% of its revenue is from refined palm-oil products, and it sources the majority of its crude palm oil (CPO) feedstock from its own plantations. Fitch believes demand for refined oil is less volatile than crude oil as most of it is driven primarily by users.

Sime Plantation’s diversified plantation operations also mitigate the risk from adverse weather, which may affect plantation productivity, as well as country-specific regulatory risks.

Sime Plantation’s upstream metrics are broadly in line with Fitch’s industry average, characterised by historical FFB yields that are slightly above, and oil extraction rates that are below the industry average.

Sime Plantation’s operating metrics are weighed down by a high proportion of old trees in Indonesia. Its average operating metrics accentuate the risks from commodity-price cyclicality and rising minimum wages in Malaysia and Indonesia.

“The company’s accelerated replanting effort in Indonesia has not yet contributed materially to yield improvement in light of the long-term gestation of oil palms but we believe its ongoing mechanisation initiatives and rationalisation of employee costs are likely to provide a more immediate impact on production efficiency.

“Fitch expects low crude palm oil (CPO) prices to continue in the short term, driven by rising output while global demand remains weak,” it said.

As a result, Indonesia and Malaysia - the two largest exporters - are pushing for the increased use of palm oil in biodiesel in an effort to promote domestic CPO demand and sustain long-term prices.

“Fitch believes the industry’s long-term outlook remains favourable, driven by consumption growth in emerging markets, CPO’s competitive advantage as the cheapest source of edible oil, and limited new plantings in Malaysia and Indonesia constraining supply,” it said.