KUALA LUMPUR (April 6): Moody’s Investors Service (MIS) has downgraded Sime Darby Plantation Bhd’s (SDP) issuer rating to Baa2, from Baa1 previously, on expectations of slower earnings growth and debt reduction.

In a note to investors, MIS said it was also downgrading the rating of a US$1.5 billion senior unsecured medium-term note programme by SDP’s wholly-owned subsidiary Sime Darby Global Bhd to (P)Baa2, from (P)Baa1, and backed senior unsecured debt rating on its sukuk to Baa2 from Baa1.

However, MIS revised its outlook on these ratings to stable from negative. 

Moody’s assistant vice-president and analyst Maisam Hasnain said while SDP expected to raise RM1 billion this year from asset sales, MIS believed that disposals would be challenging in light of the current financial market downturn.

He added that based on a medium-term price assumption for crude palm oil of RM2,100 a tonne, and the ability to raise about RM500 million from its planned asset sales, MIS expects SDP’s adjusted leverage to be reduced to 3.7 times over the next 12 months from 5 times as at December 2019. 

The high leverage levels would not support its previous Baa1 rating, he explained.

The new Baa2 rating, however, assumes that SDP’s operations would not be materially disrupted by Covid-19, as its operations across Asia, Europe and Africa have not been materially impacted, save for a brief closure of its estates and mills in Sabah.

"However, given the uncertainty around the length or magnitude of the outbreak, we will continue to monitor for any potential disruptions to SDP's operations and supply chain that could further pressure its ratings," added Hasnain.

In the next 12 to 15 months, SDP’s liquidity is expected to be weak due to its cash balance as at Dec 31, 2019 while its cash flow is expected to be insufficient to meet scheduled debt maturities, capital spending and dividends.

However, its refinancing risk is partly offset by its strong access to funding from domestic and international banks, particularly due to its shareholders Pemodalan Nasional Bhd (PNB) and the Employees Provident Fund (EPF). 

Recall that SDP had manged to refinance half of its total reported debt of RM3.9 billion in December at a slightly lower interest rate in the face of weak credit metrics.

However, any delays or perceived difficulties in SDP being able to refinance its near-term debt maturities would result in a negative rating action. 

“The outlook is stable, reflecting Moody's expectation that SDP's credit metrics will improve over the next 12 months on earnings growth and debt reduction, and that it will continue to refinance its upcoming debt maturities,” MIS said. 

Shares in SDP closed 2.52% or 12 sen lower at RM4.65, giving it a market capitalisation of RM32.01 billion.