SimeDarby

It saw its earnings weaken for its financial year ended June 2015 and how it will address its rm18 billion debt remains unclear.

It is committed to strengthening its balance sheet – which saw net gearing balloon to 58% from 38% after acquisition of New Britain Palm Oil Ltd in March 2015.

It would also consider M&A opportunities to expand its footprint.

It hopes to achieve its target of 30% to 35% gearing in the short to medium term. There has been market talk that the group is considering a rm6 billion rights issue to pare down its debts. However it is believed that a cash call may not be its best option as it would enlarge its share base and dilute earnings.

It is highly likely that until it deleverages sufficiently it might not do another acquisition, or do a combination of debt and equity to maintain gearing at current level (Aug 2015) or even bring down its debt.

In March 2015, Fitch Ratings downgraded its outlook to negative after imputing debts from the NBPOL buy. Its funds from operations) adjusted net leverage has risen to 2.5 times. The negative rating by Fitch is the biggest concern because that will impact its cost of borrowing.

Sime Darby’s borrowing cost is currently (Aug 2015) 3.4% per annum.

As at June 30, 2015, it had cash of rm3.65 billion, giving it a net debt of rm14.4 billion.

If CPO prices start to perk up or cash flow from its businesses starts to improve, then leverage is likely to moderate and they might not need to take on any major fundraising.

The group’s silver lining would be the added earnings from NBPOL, which has already begun contributions to the group.

NBPOL’s palm trees are about 19 years and have brought Sime Darby’s average trees profile down to 14 years. Given its fairly young age profile, it is in a fairly good position to weather low CPO prices.

In the meantime, apart from more borrowings or a rights issue, it is also considering unlocking value by divesting some non core assets. Monetizing assets such as land parcels and its 30% stake in Tesco is the best option for now (Aug 2015).

Sime Darby had sold off its 50% interest in Sime Darby Sunsuria Development Sdn Bhd for rm173.4 million and a 9.9% stake in E&O Bhd for a total of rm319 million.

It had put hold indefinitely the planned listing of its motor division.