S&P puts Sime Darby on Creditwatch negative

August 6, 2014

STANDARD & Poor’s Ratings Services (S&P) had placed its “A” long-term corporate credit rating and “axAAA” long-term Asean regional scale rating of Sime Darby Bhd on CreditWatch, with negative implications over talks with Kulim (Malaysia) Bhd to acquire the company’s 48.97 per cent stake in New Britain Palm Oil Ltd (NBPOL) in Papua New Guinea.

S&P also placed its “A” long-term issue ratings and “axAAA” long-term Asean regional scale ratings on Sime Darby’s senior unsecured notes under its medium-term notes programme on CreditWatch with negative implications.

“We placed the ratings on CreditWatch with negative implications because we expect Sime Darby’s leverage to increase following the company’s proposed acquisition of a stake in NBPOL,” said credit analyst Bertrand Jabouley.

“Based on NBPOL’s current share price of about €5.20 (RM22.20), Kulim’s stake in the company is worth about RM2.1 billion. NBPOL’s plantation size is about nine per cent of Sime Darby’s total landbank of about 860,000ha and 14 per cent of its total planted area of some 542,000ha.”

“We expect Sime Darby’s net debt to increase by RM5.3 billion following the acquisition, including the consolidation of NBPOL’s net debt of about RM800 million. After factoring in the acquisition, Sime Darby’s pro-forma unadjusted net debt as of June 30 would be almost double the amount we currently forecast,”  S&P said.

Papua New Guinea regulations require a company to make a takeover offer to all shareholders after a more than 20 per cent stake acquisition in a listed company. The regulations also require NBPOL to appoint an independent adviser for the proposed acquisition.

“We estimate that Sime Darby will offer €5.50 per share as part of the general takeover offer as Kulim did in August 2013 when it planned to increase its ownership to 69 per cent and all shareholders will accept the offer. The cost to Sime Darby could be considerably higher, depending on the premium offered and the success of a full NBPOL offer.”

“The acquisition could push Sime Darby’s ratio of funds from operation to debt below 45 per cent our downgrade threshold unless the company outperforms our base-case revenue expectation or takes measures to protect its balance sheet,” Jabouley said.

Based on its past record, Sime Darby could consider hiving off a subsidiary, including the motors segment, to offset the increase in debt.

“We could lower the rating on Sime Darby by at least one notch after the completion of the NBPOL acquisition. We aim to resolve the CreditWatch within the next 90 days after meeting with management to review the offer terms and the likelihood of its success, integration strategy and earnings concentration on plantation. We will also assess the impact of the incremental financing and potential offsetting measures to protect the balance sheet,” he said.  

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