KUALA LUMPUR (Sept 16): Malaysian Rating Corp Bhd (MARC) has affirmed Sime Darby Plantation Bhd's corporate credit rating at AAA, with a stable outlook.

In a statement, the rating agency said the affirmed corporate credit rating is driven by Sime Darby 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.

"The rating is 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," it added.

MARC said the stable rating outlook reflects its expectations that the CPO price level would remain above RM2,000 per tonne over the near term and that Sime Darby Plantation’s productivity will remain supportive of its ability to balance its borrowing levels with capex requirements for its replanting and new planting activities.

Sime Darby Plantation’s total cultivated oil palm plantation land stood at around 603,000ha, of a total plantation land bank of about 1 million ha, and accounting for about 4% of global CPO production at end-2017.

As 98% of its palm oil is certified sustainable palm oil (CSPO), the group retains a competitive advantage as rising concerns on sustainable practices weigh on the palm oil industry, said MARC.

"Further, Sime Darby 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."

For the financial year ended June 30, 2018, group FFB production rose 5% year-on-year (y-o-y) to 10.2 million tonnes. The overall improvement in FFB production helped to partly offset the 11% y-o-y decline in its realised CPO price of RM2,546 per tonne.

MARC expects Sime Darby Plantation’s annual cash generation to remain supportive of the group’s capital expenditure (capex) of RM1.7 billion annually, which includes an estimated RM800 million annually for replanting activities over the next three years to improve its overall tree maturity profile.

The rating agency also expects the group to continue maintaining discipline on dividend payout to meet the group’s capex requirement without recourse to borrowings.

"The ongoing capex spending that covers replanting of about 5% of the total planted area annually is expected to reduce its overall average plantation age to 10 years by 2025," it added.