Moody’s still cautious of Sime Darby
PETALING JAYA: Sime Darby Bhd’s proposed listing of its plantation and property businesses is unlikely to support its credit rating for the moment, pending the disclosure of further details on the restructuring of its finances, said Moody’s Investors Service.
In a statement yesterday, the ratings house said that it would wait for more details from Sime regarding the demerger plans, particularly on its debt situation.
“We believe that Sime’s new business profile is unlikely to support its ratings, but its final financial position will be key in our overall credit assessment.
“We will maintain our review for downgrade, as we continue to monitor the company’s internal restructuring,” said Moody’s vice president and corporate finance group senior analyst Jacintha Poh.
On Feb 27, Sime revealed further details on its spinoff plans. The existing Sime Darby Bhd would retain its motor, industrial, logistics and other businesses. At the same time, its core plantation and property businesses will be subsequently spun off in standalone listed entities.
The ratings house’s opinion is underpinned by the lack of clarity on how the proposed listing will be implemented, as well as the uncertainty in the resulting financial position.
“The proposed listing of Sime Darby’s plantation and property businesses is credit negative because the plan will reduce diversification, scale and cash flows, thereby raising the company’s business risk.”
Sime has currently been assigned a Baa1 rating by Moody’s, or several notches below its top investment grade.
The conglomerate’s debt rating was downgraded in March last year due to a large debt load, as well as deteriorating market conditions across key segments.
It is worth noting that Sime has been aggressively raising new funds to pay off borrowings and lighten its debt load.
During its latest full financial year ended June 30, 2016, the group successfully raised nearly RM6bil in extra cash, which included RM 767mil raised from asset disposals across multiple business segments.
Standalone debt numbers suggest that a majority of Sime’s existing debt was used to fund the plantation business, Moody’s pointed out.
Assuming that existing debt is reallocated based on the debts of the respective entities to be spun off, Moody’s estimates that Sime Darby Plantation Bhd’s latest adjusted debt to pretax profits (DEBT-TOE bit da or earnings before interest, tax, depreciation and amortisation) would be around four to five times, while Sime Darby Property Bhd’s would be around three to four times and Sime Darby Bhd’s would be less than one times.
“Nevertheless, it is unclear how an internal restructuring would affect debt allocation across the three entities.
“Following the listing of the plantation and property businesses, we expect an approximately two-third reduction in Sime’s asset size and pretax profits.
“In addition, its business profile would weaken significantly because it no longer has the diversification benefit from the two businesses, which are more profitable and have demonstrated greater stability despite a weaker operating environment over the past two years,” it said.