KUALA LUMPUR (Sept 3): Sime Darby Plantation Bhd (SDP), which is conducting a strategic review of its loss-making operations in Liberia, will remain prudent with investments, and is likely to incur additional debt to fund cash needs over the next 12 months, said Moody's Investors Service.

"While SDP will periodically seek similar-sized investments, we expect its management to maintain a conservative approach toward further investments such that adjusted leverage remains below its 3.5x downgrade trigger over a sustained period," Moody's analysts Maisam Hasnain, Diana Beketova and Laura Acres said in a report today.

The report was issued following SDP's release of its financial results for the year ended June 30, 2018 (FY18), which saw net profit drop 50.71% to RM1.73 billion from RM3.51 billion a year ago, on weaknesses in upstream plantations business, consisting of crude palm oil and palm kernel sales.

As for the operations in Liberia, Moody's said SDP is exploring various options, which include "collaborating with other domestic palm oil companies or selling the business outright".

In 2011, SDP made its foray into Liberia after it inked a 63-year concession agreement to develop 220,000 ha of land in four areas — Grand Cape Mount, Bomi, Gbarpolu and Bong — and turn them into oil palm and rubber plantations.

Over the next 12 months, Moody's said SDP is likely to increase its current debt pile, which stood at RM6.49 billion as at end-June after a reduction of RM2.9 billion in FY18, to fund for future cash needs.

"SDP's cash balance, along with projected cash flow from operations, will not be sufficient to meet its cash needs, including scheduled debt maturities, capital spending and dividends," added the rating agency.

If required, it said SDP could roll over its short-term obligations as the plantation firm enjoys superior access to funding from domestic and international banks.

Moody's observed that the move to incur additional borrowing followed SDP's announcement to fork out RM491 million and pay its shareholders with a special dividend of 3 sen per share, which is on top of the proposed final dividend totalling RM544 million.

"The special dividend is credit negative as it will increase the company's cash needs over the next 12 months," it said.

"However, the cash outflow for dividends will be lower than total dividends declared because SDP plans to establish a dividend reinvestment plan, which allows shareholders to reinvest their cash dividends into additional shares," it added.

Going forward, Moody's expect SDP's upstream to continue to drive earnings and generate an annual profit before interest and tax (PBIT) of RM1.7 billion in the next two financial years, which is based on the crude palm oil price assumption of RM2,300 per tonne.

"While downstream operations, which include bulk refineries, specialty fats, and oleochemicals, continue to grow, SDP's upstream operations will contribute more than three quarters of total PBIT over the next two years," it added.