This article first appeared in The Edge Financial Daily on November 1, 2017

KUALA LUMPUR: Moody’s Investors Service has downgraded the issuer rating for Sime Darby Bhd, which is in the midst of a demerger, to Baa3 from Baa1, with a stable rating outlook.

“The downgrade reflects a significant reduction in Sime Darby’s scale and cash flow, and in particular, a weakening in its business profile, because it can no longer benefit from the diversification afforded by its plantation and property businesses, which are more profitable than the rest of its operations,” Moody’s vice-president and senior analyst Jacintha Poh said in a statement yesterday.

The rating action concludes its review of Sime Darby’s rating for downgrade, which was initiated on Feb 3, after the group announced a plan to create three standalone businesses. Under the move, the group will retain its motor, industrial, logistics and other businesses, while listing its plantation (Sime Darby Plantation Bhd) and property (Sime Darby Property Bhd) divisions on Bursa Malaysia. The group expects the demerger to be completed by end-2017.

Moody’s believes Sime Darby’s Baa3 rating will be supported by its strong global positioning within its motor and industrial businesses, where it has a long operating track record and enjoys a broad presence across the Asia-Pacific.

Moody’s said Sime Darby has the second-largest Bayerische Motoren Werke Aktiengesellschaft (BMW) dealership globally and the third-largest Caterpillar Inc dealership globally. “Looking ahead, we expect Sime Darby will maintain market leadership positions for its motor and industrial businesses, supporting stable leverage and interest coverage ratios within its Baa3-rating threshold,” Poh said.

Moody’s also expects Sime Darby to keep a heavy reliance on short-term funding, though refinancing risk is partially mitigated by Sime Darby’s superior access to funding, given its ownership by government-linked shareholders.

As at Sept 30, Sime Darby was 6% directly owned by Permodalan Nasional Bhd (PNB), 43% by Skim Amanah Saham Bumiputera, 7% by other PNB-managed funds, and 11% by the Employees Provident Fund.

Meanwhile, the stable rating outlook reflects Moody’s expectation that Sime Darby’s motor business will remain stable, while its industrial business will improve on the back of stronger coal prices.

Moody’s also expects Sime Darby to continue to demonstrate a disciplined financial policy, including low debt levels, though it said the rating is unlikely to be upgraded over the next 12-18 months, given its small scale and inherent cyclicality in its operations.

But a track record of maintaining stable cash flow and strong credit metrics with reduced reliance on short-term funding will lead to positive momentum for the rating, it added.