Highlights

• Sime Darby’s credit rating was cut to BBB+ from A - by Standard & Poor (S&P) due to uncertainty over timing, magnitude of Sime Darby’s deleveragi ng pl an to protect balance sheet, improve cash flow adequacy to levels commensurate with S&P’s expectations. Comments

• This does not come as a big surprise to us gi ven Sime’s relatively high gearing ratio of 0.61x and several failed attempts to deleverage and monetise assets. Since the acquisition of NBPOL, management had been keen to reduce its gearing level. This was supposed to be done through the listing of its motor division. However, the IPO for its motor division has put on hold indefinitely due to the weak market condition.

• Pare down gearing level through asset monetisation and perpetual Sukuk. In Jan-16, Sime has proposed an RM3b perpetual sukuk programme to enhance its financial credit matrix. Besides that, it also plans to rise about RM1.5b of net proceeds through its asset monetisation programme for its commercial and industrial assets in Singapore and Australia. It has had identified 13 assets in Australia and three in Singapore for the planned asset monetization. This could reduce its gearing level to 0.54x by end FY16 from 0.61x currently. Earnings

Forecasts

• No change to our earnings forecast. However, we note that Sime’s finance cost may rise after the S&P downgrade.

Risks

• Sharp fall in FFB output and/or palm product prices at the plantation division;
• Prolonged weak demand for mining equipment; and
• Delay in property launches.

Rating

HOLD

Positives

• Strong balance sheet.

Negatives

• (1) Cooling economic activities in China and Australia may have an adverse impact on Sime Darby’s earnings; and (2) Overseas expansion risk.

Valuation

Maintain HOLD with unchanged target price of RM7.00 based on SOP.

Source: Hong Leong Investment Bank Research - 29 Feb 2016