07.05.2020 (New Straits Times Online) - KUALA LUMPUR: Fitch Ratings has taken negative rating actions across its coverage of palm-oil producers in Malaysia and Indonesia.
The rating agency said the review resulted in one rating downgrade and two rating affirmations with outlook revisions to "negative" from "stable".
It said the portfolio review followed the revision in its Malaysian benchmark crude palm oil (CPO) price forecasts for 2020 and 2021, which have been trimmed by US$30 per tonne and US$15 per tonne to US$520 per tonne and US$560 per tonne, respectively.
"We have lowered our palm-oil demand expectations for 2020-2021 due to the sharp fall in CPO prices, which is likely to discourage biodiesel blending due to the wide palm oil-gas oil spreads, and reduced edible-oil demand as people cut their travel and outside-food consumption," it said in a statement yesterday.
It added supply would likely to rise due to better weather conditions and yields, assuming a CPO price of US$600 per tonne from 2022.
Fitch said the outlook for Malaysia-based palm oil producer Sime Darby Plantation Bhd's (SDP) long-term issuer default rating has been revised to "negative" from "stable" as all ratings have been affirmed at 'BBB'.
"The negative outlook reflects the risk that the coronavirus pandemic may further delay SDP's assets disposal plans. This, combined with the revised CPO price assumptions, will likely keep its leverage, measured as funds from operations net leverage, above the negative rating sensitivity of three times for an extended period."
Fitch previously expected SDP's leverage to fall closer to three times by end-2021. However, it now expects the company's deleveraging trajectory to be delayed by around one year.
Fitch said SDP's liquidity is supported by good access to diversified funding sources, which benefits from its position as the world-largest certified palm-oil producer by planted acreage.
"SDP refinanced a RM3.2 billion term loan due June 2020 in December 2019 through new term loans totalling RM3.9 billion.
"SDP does not have any significant debt maturities in the next 24 months after the refinancing. SDP's liquidity is also supported by a portfolio of non-core assets totalling RM1 billion, which the company plans to dispose in 2020, and undrawn uncommitted lines from lenders amounting to around RM1.8 billion."
Fitch said SDP only disposed of RM194 million in non-core assets in 2019, significantly less than the company's expectation of RM1 billion and Fitch's expectation of RM700 million.
SDP said the delay was due to administrative processes and pending government approvals, while expecting to meet the RM1 billion disposal target for the full year.
"However, Fitch is only assuming a minimal disposal in 2020 in our rating-case forecast due to the challenging market environment and the risk that the transactions may not be completed and proceeds not received as scheduled in light of the ongoing pandemic and social distancing measures."
It said SDP's fresh fruit bunch (FFB) yield dropped to 19.7 tonnes per hectare in 2019 from 20.8 tonnes per hectares in 2018 due to prolonged dry weather in Malaysia and Indonesia and higher seasonal rainfall in Papua New Guinea.
"Lower plantation productivity, coupled with the continued high operating costs in Papua New Guinea and a high proportion of old trees in Indonesia, offset the benefit from production-costs efficiency efforts in Malaysia."
Fitch said palm-oil cultivation is inherently capital intensive as companies must commit to regular upkeep and replanting to maintain a plantation's productivity and a balanced tree-age profile.
"We assume total capital expenditure will be only slightly lower in 2020 at RM1.3 billion compared with the historical average of around RM1.6 billion."
Meanwhile, it said SDP's rating reflects its position as the world's largest palm-oil producer, with more than 600,000 hectares of planted area and annual downstream capacity of 3.8 million tonnes.
Fitch regards SDP's high proportion of certified-oil output as positive for its business profile, as it provides the company with access to developed markets, where it can earn higher downstream margins from more stable demand and customisation.
SDP reported that more than 90 per cent of its oil output was certified as sustainable; this is the highest certification ratio among its peers.