Standard  &  Poor’s  Rating  Services  (S&P)  has  affirmed  its  ‘A’  long-term corporate credit rating on SIME with a negative outlook due to a significant increase in net debt expected from the successful offer for New Britain Palm Oil Ltd (NBPOL). It also affirmed its ‘A’ long-term issue rating on the senior unsecured notes under the group’s MTN programme. According  to S&P, it affirmed the ratings because it believes SIME has a credible deleveraging plan  to  offset  the  impact  of  its  acquisition  of  NBPOL.  It  added  that  the outlook may be revised to stable if (i) SIME does not proceed with its offer on NBPOL and maintains the funds from operation to debt ratio in excess of 45%  by  30  June  2015  or  (ii)  has  a  credible  plan  to  protect  the  balance sheet. (Source: The Star)

Comment: This is positive as there were concerns that the ratings might be lowered  after  the  acquisition  of  NBPOL.  SIME  has  been  prudent  in  its investment and capital expenditure and we expect it to continue to do so. We maintain our HOLD rating for SIME with an unchanged TP of RM8.50, which  does  not  take  into  account  any  preferential  distribution  in  the impending motors business IPO.

Source: Affin Hwang Capital Research - 20 Jan 2015