Key Findings
- Sime Darby Plantation Clear Financial Winner in Split.
- Key Risk: Will Plantations Division Maintain Responsible Agriculture Charter and Sustainability Commitments That Drive Revenue?
- Key Risk: Will Plantations Division Evolve Liberian Operations to Outgrower Model?
Sime Darby to Split Into Three Corporations in 2018 But No IPO
As written by Chain Reaction Research, Sime Darby(OTC:SMEBF) announced that shares of its property and plantation divisions will be distributed to current shareholdersin 2018, in proportion to their shareholdings in Sime Darby.
The conglomerate will split into three publicly-traded companies: Sime Darby Plantation while manage the plantation business, Sime Darby Property will stay in property management and Sime Darby will comprise its trading business, motor and industrial, logistics and other businesses including healthcare, insurance, retail and investments.
As a result, Fitch Ratings put Sime Darby (BBB+) – the remaining company after the proposed spin-off of Plantations and Property – on Rating Watch Negative. Kenaga Research also downgraded Sime Darby to “market perform”.
Sime Darby Plantation may be the winner if leverage post-restructuring is similar to Sime Darby’s current level 3x (net debt/EBITDA). Sime Darby Plantation’s global scale and integrated operations, its leading position producing certified products and an efficient operating cost structure strengthen its credit profile. Recent high crude palm oil prices, for example, Malaysian free-on-board (FOB) spot prices have averaged of $735 per ton in 2017 compared to $500 per ton end of 2015, have improved revenue.
The MYR 3 billion perpetual sukuk program (BBB+) and the $1.5 billion sukuk program (all BBB+) will probably be distributed to the new Sime Darby Plantation spin off. The underlying assets for these two sukuk programs are plantation land and related assets.
Of course, the reason crude palm oil prices have increased are because of the climate change-magnified strength of the recent El Nino that drove devastating and fatal regional fires throughout SE Asia in 2015. This has led to contracted palm oil inventories. Malaysian inventories in December 2016 were at their lowest levels in 10 years.
Sime Darby President and Group Chief Executive Tan Sri Bakke Salleh said the reorganization exercise will not include issuing new shares, which means no cash will be raised from the restructuring.
- Sime Darby Plantationswill include Malaysian, Minamas, NBPOL and Liberian operations. Sime Darby Plantations will be the largest producer of certified sustainable palm oil (CSPO), at 2.6 million metric tons annually. This equals 23 percent of global CSPO output. Its total landbank will be 988,599 ha. 603,254 ha are planted, making Sime Darby the world’s largest oil palm plantation company. Sime Darby’s Indonesian planted landbank is 203,000 ha, 16 percent is under three years old. It also sells market leading seeds that have significant improved yields. Its downstream sub-segment includes 11 refineries.
- Sime Darby Propertywill include Battersea Power Station and Malaysian properties including Malaysia Vision Valley, Carey Island and property along the High Speed Rail Link. Battersea Power Station is a decommissioned coal-fired power station located on the south bank of the River Thames, in Nine Elms, Battersea, an inner-city district of South West London.
- Sime Darbywill include Sime Darby Industrial, Sime Darby Motors and its Logistics and Healthcare Divisions. Sime Darby Motors represents 28 brands in ten countries with sales volume of 83,000 units in Asia and Australia. Sime Darby Logistics owns and operates five ports with a total throughput of 30.3 million metric tons of general cargo and 215,700 standard 20-foot shipping containers. Its Healthcare Division is a 50/50 joint venture with Ramsay Health Care, operating six hospitals in Malaysia and Indonesia. Sime Darby’s Motors in the second-largest BMW dealer in the world. Sime Darby’s Industrial is the third largest Caterpillar dealer in the world. Industrial’s sales to the construction and mining sectors improved in 2016. Marine and shipyard sectors hampered profitability in 2016 due to weak market conditions.
Based on Sime Darby’s latest audited financial statements for the financial year ending June 30, 2016, its Plantation and Property businesses were 41 percent and 32 percent of its overall profit after tax, respectively.
In October 2016, Sime Darby raised $571 million in a private placement of 316.4 million shares. The private placement was oversold with demand greater than shares issued. Demand was for close to $1.5 billion in equity, or about 2.5x greater than the capital raised. The deal issued 316.4 million new shares priced at 7.45 ringgit, a 3.0 percent discount to Sime Darby’s five-day volume weighted average of 7.68 ringgit. This was the third largest equity capital market deal in SE Asia in 2016. Sime Darby stated it would use these proceeds for debt repayment, capital expenditures and working capital, and financing for the private placement issue itself. The company reported that its focus would be on reducing its debt-to-equity ratio to 38 percent from 46 percent. Therefore, analysts say there appears to be demand for Sime Darby equity since the private placement was oversold.
Several major questions are raised by the restructuring, notably whether Sime Darby Plantations will continue its financial risk management of its material risks from deforestation and human rights factors in its products it sells downstream.
Responsible Agriculture Charter and Sustainability Commitments?
In September 2016, Chain Reaction Research reported that Sime Darby Plantation launched its Responsible Agriculture Charter. In a news release, Sime Darby President and Group Chief Executive Tan Sri Dato’ Seri Mohd Bakke Salleh said:
“This Charter represents a new starting point and an important juncture in Sime Darby’s sustainability journey as we seek to progress further. We believe that responsible agriculture plays a critical role to ensure food security needs are met and can provide a pathway to alleviate rural poverty and improve livelihoods, sustainably.”
The charter – and its approaches to deforestation and human rights risk mitigation – is supposed to apply to all of Sime Darby’s palm oil operations immediately with future deadlines for palm oil supply chains and other agriculture products. Yet it is unknown if the new Sime Darby Plantation company will maintain Sime Darby’s Responsible Agriculture Charter and other associated similar sustainability commitments.
Liberian Operations?
In November 2016, Chain Reaction Research reported that Sime Darby’s 220,000 ha plantation in Liberia contains 45 percent high-density forest, which cannot be developed without violating the company’s Responsible Agriculture Charter or its other sustainability and RSPO commitments. The figure of 45 percent undevelopable is conservative as it is not adjusted for medium-density forest – an additional 34 percent – or biodiversity hotspots. Full concession development would require Sime Darby to negotiate Free, Prior and Informed Consent with 55 towns. Sime Darby to date is in the process of negotiating agreements with only three towns. Finally, to date, Sime Darby has planted 10,411 ha palm oil and 107 ha rubber.
Sime Darby’s Liberian business model is at a crossroads, and as it restructures the company may want to consider innovating to an outgrower model to minimize their material financial risks from potential human rights and deforestation violations.
