Fitch  has  revised  the  outlook  on  SIME’s  long  term  foreign  and  local currency issuer default ratings to “negative” from “stable” following the steep increase in the company’s funds from operations adjusted net leverage to 2.5x  from  the  “negative  rating  action”  threshold  of  1.75x.  Fitch  noted  the deleveraging process after the debt-funded acquisition of NBPOL will take longer than initially expected due to the weaker than expected performance of  the  industrial  equipment  business  and  the  higher  net  debt  to  fund  the property development business. Commodity prices have also continued to fall near marginal cost.

The  rating  for  SIME’s  senior  unsecured  rating  and  US$1.5b  sukuk  issue have been reaffirmed at “A”.

Comments:  We do not expect the revision on the default ratings outlook to “negative” to have a significant impact on sentiment towards SIME as the listing  of  its  motor  division  is  still  in  the  works  even  though  delayed.  As noted by Fitch, the motor business IPO would result in financial leverage of SIME  declining  towards  Fitch’s  negative  trigger  of  1.75x.  Meanwhile,  the dividend reinvestment plan will help to trim gearing.

SIME closed at RM9.27 yesterday and our recommendation is maintained at  HOLD  with  an  unchanged  TP  of  RM8.96  (@  16x  CY16E  EPS). Operationally, we are concerned about the declining billings and profitability of the plantation, industrial and property businesses.

Source: Affin Hwang Capital Research - 31 Mar 2015