Falling crude palm oil (CPO) price does not bode well for Sime Darby Bhd going into its financial year 2015 (FY15) as a substantial part of the conglomerate’s net profit comes from its vast oil palm plantations, according to president and group CEO Tan Sri Mohd Bakke Salleh.
In its FY14 ended June 30, the conglomerate declared a revenue of RM43.91 billion and pretax profit of RM4.22 billion.
An average CPO price of RM2,451 per metric tonne (mt) translated into RM10.95 billion revenue for its plantation division, constituting 25% of its FY14 revenue but taking a bigger share of pretax profit at RM1.87 billion or 44.4%.
“The CPO price outlook for the rest of 2014 is to range between RM1,900 per mt and RM2,220 per mt,” Mohd Bakke told the media in Kuala Lumpur last Friday, adding that the cost of production could be up to RM1,700 per mt.
A falling CPO price would definitely erode Sime Darby’s revenue and profit.
Mohd Bakke said: “Each RM100 drop in CPO price (per mt), our net profit is affected by RM250 million.”
But, if Sime Darby is successful in acquiring New Britain Palm Oil Ltd (NBPOL), this will increase its planted hectares by 15% from the current landbank of around 858,879ha, of which 525,325ha are planted with oil palm and 7,811 with rubber.
The deal, which could cost more than RM6 billion, resulting in Standard & Poor’s Rating Services putting Sime Darby’s ratings on credit watch with negative implications due to the rising leverage.
Moody’s Investors Service disputed the call saying that even if leverage rises above 2.5 times, as a result of the purchase of NBPOL, it expects Sime Darby will have the flexibility to reduce leverage over the medium term, such that the rise would not stretch beyond a fiscal year.
According to Sime Darby’s CFO Datuk Tong Poh Keow, its cash and bank balance was RM4.4 billion as at end of FY14 while gross gearing ratio was at 38%.
Sime Darby could end up with some cash upon the listing of its motor division, which is its biggest revenue contributor at RM17.77 billion or 40.5% of FY14 revenue but only contributing RM634.5 million or 15% of pretax profit.
Mohd Bakke said the listing could happen within the firsthalf (1H) of 2015, depending on market conditions, adding that the market conditions is the most important element.
Nonetheless, he was mum on the size of the offer, which news report have speculated to be in the range of US$500 million (RM1.58 billion) to US$900 million.
Commenting on its FY14 financial results, which saw net profit dropping 9% to RM3.35 billion from RM3.7 billion declared in FY13, Mohd Bakke said although the year was tough, all divisions in the group achieved their internal targets.
Its FY14 net profit represented a 19.7% hike over its key performance indicator (KPI) target of RM2.8 billion, helped by RM263 million from disposal of assets.
In FY13, Sime Darby’s profit also exceeded its KPI of RM3.2 billion, also helped by disposal of assets of RM471 million.
Sime Darby will announce its KPI for FY15 at its AGM to be held in November 2014.
So far in FY15, Sime Darby has collected some profits, the first with the sale of a 9.9% stake in Eastern & Oriental Bhd (E&O) for RM319 million, gaining about RM56 million, followed by a land sale to E&O for RM240 million.