[MARC] MARC Ratings affirms ratings on SD Guthrie

MARC Ratings has affirmed SD Guthrie Berhad’s corporate credit rating at AAA. Concurrently, the rating agency has also affirmed its rating on SD Guthrie’s Perpetual Subordinated Sukuk Programme (Perpetual Sukuk) of up to RM3.0 billion at AAIS. The two-notch rating differential between SD Guthrie’s corporate credit rating and the Perpetual Sukuk rating is in line with MARC Ratings’ methodology on notching principles of subordinated and hybrid instruments. The ratings outlook is stable.

SD Guthrie’s very strong market position in upstream crude palm oil (CPO) operations, well-established track record and strong balance sheet remain key rating drivers. These strengths are underpinned by the group’s healthy cash flow generation, of about RM3.0 billion p.a. over the last four years, from its sizeable and geographically diversified upstream operations. The rating agency also views that this financial strength enables the group to absorb additional costs arising from regulatory changes in the plantation industry.

SD Guthrie’s corporate credit rating benefits from a one-notch uplift from its standalone rating of AA+ based on the rating agency’s assessment of support from parent Permodalan Nasional Berhad. Notwithstanding this, MARC Ratings has placed SD Guthrie’s standalone rating on a positive outlook, mainly based on the group’s improved capital structure and strong potential to further increase earnings diversification. This view is underscored by SD Guthrie’s venture into two verticals, industrial development and renewable energy, by leveraging its vast idle and urbanised landbank. These follow the recent rebranding exercise under which SD Guthrie assumed its current name, delinking its association with the “Sime” brand.

SD Guthrie remains the world’s largest oil palm plantation owner by hectarage, spanning 566,947 ha across Malaysia (52.0%), Indonesia (32.0%), and Papua New Guinea/Solomon Islands (PNG/SI) (16.0%) as at end-June 2024. Its sustained profitability track record through commodity price cycles can be attributed to its fully entrenched integrated operations, from planting material development and cultivation, to milling and refinery activities.

During 1H2024, fresh fruit bunch (FFB) production grew by 8.2% y-o-y to 4,174 million MT, translating into FFB yield of 8.73 MT/ha (1H2023: 7.88 MT/ha); the improvement has been attributed to higher labour productivity in Malaysia. In tandem with higher production volume and lower fertiliser cost, production cost declined to RM2,567/MT, from around RM2,700/MT in the previous corresponding period. The rating agency expects continued growth in FFB output alongside lower production cost to support earnings prospects for full year 2024; these expectations are moderated by lower yields from Indonesia due to the impact from El-Niño in 2023 that has persisted into 1H2024 as well as from PNG due to wet weather conditions on the island.

In 1H2024, its refining operations with a combined capacity of 3.99 million MT in Asia Pacific and Europe registered 17.4% y-o-y growth in sales volume. The downstream performance could be boosted by the fact that SD Guthrie is among the few global plantation groups that can meet the European Union’s stringent sustainable palm product requirements under its Deforestation Regulation which is expected to come into effect at end-2025. Nonetheless, this could be partly offset by low margins from its downstream operations in the Asia Pacific region due to the prevailing stiff competition.

Group revenue and operating profit rose 11.1% y-o-y and 23.0% y-o-y to RM9.3 billion and RM1.0 billion, in line with the increased CPO price alongside higher FFB production. The group had a realised CPO price of RM3,961/MT in 1H2024 (1H2023: RM3,824/MT). Cash flow from operations (CFO) interest and debt coverages stood at 9.50x and 0.53x in 2023. MARC Ratings expects CFO coverage measures to moderate, but remain favourable, in line with CPO price movements. The impact from the measures unveiled in Budget 2025 on its profitability is expected to be minimal. Among these is the increase in monthly minimum wage from the current RM1,500 to RM1,700; this will be partly offset by the estimated RM25.0 million in savings from the upward revision of the windfall profit levy threshold on palm oil.

Consolidated borrowings stood at RM6.0 billion in 1H2024, while adjusted debt-to-equity (DE) ratio was 0.41x, taking into account the reduced equity credit of 25.0% accorded to the perpetual sukuk from the initial 50.0%. Group DE ratio has steadily declined from 0.63x at the time the rating on the senior programme was assigned in 2017 to the current level. Upon full amortisation of the equity credit on the first call date of the perpetual sukuk in March 2026, the rating agency expects leverage to broadly remain around 0.40x. The group’s commitment to spend an average of RM900.0 million p.a. on replanting is expected to be largely funded internally. This will support SD Guthrie’s favourable tree maturity profile of which about 59.0% of its trees are of young mature and prime age. Liquidity, as reflected by cash and bank balances, stood at RM603.0 million, providing a net adjusted DE of 0.38x.

Vanessa Leong, +603-2717 2931/ xinyue@marc.com.my
Umar Abdul Aziz, +603-2717 2962/ umar@marc.com.my
Taufiq Kamal, +603-2717 2951/ taufiq@marc.com.my