Thursday 28 Mar 2024
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KUALA LUMPUR: Fitch Ratings Inc has revised its outlook on Sime Darby Bhd’s long-term foreign and local currency issuer default ratings (IDR) to “negative” from “stable”. The IDRs and the company’s senior unsecured rating are affirmed at A. Fitch has also affirmed the rating on the company’s US$1.5 billion (RM5.56 billion at the current exchange rate) sukuk issue at A.

In a statement yesterday, Fitch said the revision of the outlook to “negative” followed a sharp increase in Sime’s (fundamental: 1.0; valuation: 0.9) fund from operation-adjusted net leverage to about 2.5 times in the first half of its financial year ending June (1HFY15) compared with FY14’s 1.52 times. It said it was well above the 1.75-times level at which Fitch would consider negative rating action.

While Fitch expected the increase in leverage after the debt-funded acquisition of New Britain Palm Oil Ltd, the agency now estimates that the deleveraging process would take longer than initially expected.

This is due to the weaker-than-expected performance of Sime’s industrial equipment unit and higher net debt to fund the property development business.

While Fitch expects Sime to maintain its dividend payout ratio at some 50%, the cash payout is likely to decline due to the success of the dividend reinvestment plan, which would help to reduce leverage.

Still, Fitch believes the group will tide over this period of low prices, but margins — in US dollars and in per tonne terms — would remain depressed in the next 12 to 18 months.

It also said Sime’s failure to reduce its financial leverage to below 1.75 times by end-FY16, a downgrade in Malaysia’s country ceiling of A and an increase in the role of the Malaysian sovereign or related entities in Sime’s decision-making process might lead to negative rating action.

 

This article first appeared in The Edge Financial Daily, on March 31, 2015.

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