Budget 2019 has limited impact on Petronas, Genting and Sime Darby Plantation

Apart from Petronas, other proposals announced in Budget 2019 are the revision of casino duties and initiatives in the palm oil industry


Petroliam Nasional Bhd’s (Petronas) special one-off dividend of RM30 billion to be paid to the state in 2019 is not expected to reverse the company’s net cash position.

Instead, Fitch Ratings Inc (Fitch Rating) viewed the special dividend as an addition to regular dividends, which is expected to be between RM20 billion and RM26 billion in 2019 compared to RM24 billion in 2018.

“Fitch does not rule out the possibility of higher dividend payouts over the coming few years, supported by a likely increase in Petronas’ profits compared to 2017,” the agency said in a statement yesterday.

It added that Petronas reported cash balances of RM174 billion and debt of RM66 billion as at end-June 2018.

Despite the potentially higher dividends, Fitch Rating expects the state-owned oil and gas (O&G) company’s standalone credit profile of AA- to remain intact.

Fitch Rating also said the government has historically allowed Petronas to maintain a robust credit profile and cash balances with its dividends being lowered in line with weaker earnings, as was the case in 2015 and 2016.

“We think the government would support Petronas maintaining a sustained healthy credit profile due to its importance in generating national revenue and given the company’s need to expand, to sustain and improve its earnings generation.

“The Issuer Default Ratings on Petronas remain constrained by Malaysia’s ratings (A-/’Stable’) as per Fitch’s Government-Related Entities Rating Criteria,” the statement read.

Fitch Rating added that the government can exert significant influence and control over Petronas’ operating and financial policies, as is evident in the proposed special dividend,

Apart from Petronas, other proposals that were announced in the recent Budget 2019 are also expected to have only a limited impact to related organisations including Genting Bhd and Sime Darby Plantation Bhd.

Among the announcements that are expected to affect the companies include the revision of casino duties of up to 35%, as well as the implementation of a 10% palm oil blending rate (B10 programme) for biodiesel used in the transportation sector and 7% rate for biodiesel in the industrial sector, along with the RM30 million allocation to assist smallholders to obtain Malaysian Sustainable Palm Oil certification.

Fitch Rating estimated that Genting’s consolidated earnings before interest, taxes, depreciation, amortisation and restructuring, or rent costs (Ebitdar) after minorities will decline by around 8%-9%, following the proposal to increase the casino duties.

The agency also expects Genting’s net debt/Ebitdar will increase to 0.6 time in 2019 and 0.9 time in 2020 versus its previous expectation of 0.5 time and 0.7 time respectively, assuming the tax rate will increase by 10 percentaage points on gaming revenue before factoring in any potential cost savings from Genting Malaysia Bhd’s review of its marketing strategy and cost structure.

Under this scenario, Fitch Rating said Genting’s financial profile remains in line with the agency’s leverage expectation of below one time, although headroom is reduced as the company embarks on its third large-scale integrated resort development in Las Vegas of the US.

Meanwhile, Fitch Rating viewed the government’s initiatives in the Malaysian palm oil industry as positive, as it would support the industry in the long term.

However, Fitch Rating said the impact is likely to be limited on overall demand and crude palm oil (CPO) price in the short term.

The Malaysia plantation minister in 2016 estimated that additional demand when the B10 blending programme is fully implemented will reach about 750,000 tonnes of CPO, which is small relative to Malaysia’s total annual production of 19.9 million tonnes.

Therefore, the agency expects neutral rating impact on Sime Darby  Plantation.