KUALA LUMPUR: Fitch Ratings has affirmed Sime Darby Plantation Bhd's (SDP) long-term foreign-currency issuer default rating (IDR) at 'BBB+' with a stable outlook.
The ratings agency has also has also affirmed SDP's senior unsecured rating and its USD$1.5 billion sukuk programme and the outstanding issuance under the programme at 'BBB+'.
Key driver for the rating include SDP's funds from operations (FFO) adjusted net leverage fell to 3.2x by the end of the financial year to June 2018 (FY18) from 3.7x in FY17, better than Fitch's expectation of 3.5x.
This was due to the company fetching higher prices for the land it sold than we had forecast.
Fitch expects SDP to dispose of more land parcels over the next 24 months, supporting our deleveraging expectation towards FFO adjusted net leverage of below 2.5x by its financial year (FY) 2020.
In addition, Fitch said SDP's rating reflects its position as the world's largest palm-oil producer by planted area, diversified plantation locations and operating integration, which allows optimum profit retention.
SDP reported total planted area of around 600,000 hectares as of 30 June 2018 and annual fresh fruit bunch (FFB) production of over 10 million tonnes from its operation in Malaysia, Indonesia, Papua New Guinea, Solomon Islands and Liberia.
More than 70 percent of SDP's revenue is from refined palm-oil products, and it sources the majority of its crude palm oil (CPO) feedstock from its own plantations.
Fitch believes demand for refined oil is less volatile than crude oil as most of it is driven primarily by users.
SDP's diversified plantation operations also mitigate the risk from adverse weather, which may affect plantation productivity, as well as country-specific regulatory risks, Fitch report noted.
The rating agency further said SDP's upstream metrics are broadly in line with Fitch's industry average, characterised by historical FFB yields that are slightly above, and oil extraction rates that are below the industry average.
Fitch thinks SDP's commitment to sustainable palm oil will allow the company greater access to developed markets where demand is more stable and there is a premium attached to certified palm-oil products.
Fitch expects low crude palm oil (CPO) prices to continue in the short term, driven by rising output while global demand remains weak.
As a result, Indonesia and Malaysia - the two largest exporters - are pushing for the increased use of palm oil in biodiesel in an effort to promote domestic CPO demand and sustain long-term prices.
Fitch believes the industry's long-term outlook remains favourable, driven by consumption growth in emerging markets, CPO's competitive advantage as the cheapest source of edible oil, and limited new plantings in Malaysia and Indonesia constraining supply.