Sime Darby announced that it has proposed a cash offer to repurchase its outstanding sukuk of USD800mn due in 2018 and 2023. Besides, it is also seeking consent from sukuk holders for Sime Darby Plantation to be the new obligor. The sukuk tender offer will expire on May 11 and the settlement date for both proposals is expected to be 23 May 2017. The proposals are conditional on sukuk holders representing at least 75% of the outstanding sukuk’s face amount to pass the extraordinary resolutions.

Details on the USD Sukuk

Both Sukuk were part of the multi-currency sukuk programme of up to USD1.5bn set up by the Sime Darby on Jan 11, 2013. The 5-year sukuk was issued at a fixed coupon rate of 2.053% while the 10-year sukuk was issued at 3.29%. Most of the sukuk holders are from Asia, Middle East and Europe. Yesterday, Moody's Investors Service has assigned a first-time Baa1 issuer rating to Sime Darby Plantation Sdn Bhd (SDP) with stable rating outlook. Meanwhile, Fitch Ratings also expected to assign SDP a Long-Term ForeignCurrency Issuer Default Rating (IDR) of 'BBB+(EXP)' with stable outlook, and an expected senior unsecured rating of 'BBB+(EXP)'.

Not Overly Positive on the Proposals

Management guided that the tender offers are part of its internal asset and debt restructuring exercise prior to the de-merger of Sime Darby Plantation and Sime Darby Property. We are not overly positive on the proposals as the savings in interest payments are not significant to bottomline. According to Sime Darby’s annual report, the USD sukuk represents the lowest ever coupon issued globally by any corporate organisation in the USD Sukuk market; the lowest ever USD coupon in Sukuk format by an Asian issuer; and the lowest ever coupon by a Malaysian borrower in the USD market, in both the five and ten year tenures. Assuming all sukuk holders tender their sukuk and no fund-raising exercise takes place in Sime Darby, a quick back-of-the-envelope calculation revealed that the deal will enhance Sime Darby’s FY17-FY18 earnings by merely 1% – 2.4% (MYRUSD rate: 4.40). That said, the saving could be more significant with the weakening of USD.

Valuation

We maintain our FY17-18 earnings projections pending the outcome of sukuk tenders. Maintain Sell on Sime Darby with an unchanged target price of RM8.24, based on SOP valuation. Sime Darby is currently trading at a lofty valuation of approximately 29x CY17 EPS versus its 5-year average rolling forward PER of 24x. The earnings growth has been priced in, in our view. Maintain SELL on Sime Darby

Source: TA Research - 19 Apr 2017