Sime Darby Raises $571 Million In 3rd Largest SE Asian Deal This Year

| About: Sime Darby (SMEBF)

Summary

Sime Darby Adjusts its Capital Stack.

Sime Darby's Private Placement Oversubscribed.

U.S. Institutional Investing in Cameroon.

Sime Darby Raise $571 Million in 3rd Largest SE Asian Deal in 2016, U.S. Institutional Investing in Cameroon

Sime Darby (SIME:MK) raised $571 million in a private placement of 316.4 million shares. The private placement was oversubscribed with demand greater than shares issued. Demand was for close to $1.5 billion in equity, or about 2.5x greater than the capital raised. The deal issued 316.4 million new shares priced at 7.45 ringgit, a 3.0% discount to Sime Darby's five-day volume weighted average of 7.68 ringgit.

Since Sime Darby's announcement, its shares have traded slightly higher towards 7.85 ringgit, in the middle of its 52-week range of 7.00 to 8.87 ringgit. While analysts are generally bullish on Sime Darby, Sime Darby, compared to its peers, still maintains higher long-term debt to total capital ratios. Given that crude palm oil (CPO) spot prices, while trending higher in 2016 than in 2015, production costs are also rising.

Sime Darby is responsible for 4% of global CPO production, with significant resources in Indonesia, Papua New Guinea, Malaysia, Solomon Islands, and Liberia. This makes Sime Darby sensitive to both operational margins and global supply and demand curves. Nonetheless, near-term equity valuation until the end of 2016 remains the same, with its target price within current analyst expectations. Sime Darby restructuring its capital stack may be more relevant in 2017 from a valuation perspective than in 2016.

This is the third largest equity capital market deal in SE Asia in 2016. In July Malaysia Building Society raised $711 million on a rights issue and in June Frasers Logistics raised $665 million in an initial public offering in Singapore.

Sime Darby will reportedly use the proceeds for debt repayment, capital expenditures and working capital, and financing for the private placement issue itself. The company reported that its focus will be on reducing its debt-to-equity ratio from 0.46% to 0.38%.

Sime Darby is the world's largest palm oil producer measured by hectares. Sime Darby also has real estate, automotive, and industrial equipment divisions.

In 2016, Sime Darby has raised capital through other portfolio alignment activities. It raised $78 million from selling part of its stake in Eastern & Oriental and raised $131 million from selling land in Malaysia and Singapore. It also disposed of other real property assets in Singapore and Australia. Finally, Sime Darby has announced 3% job cuts in its industrial division.

U.S. Instituitonal Investing in Cameroon

The Cameroon Development Corporation (NASDAQ:CDC) is seeking to increase its palm oil production 67% by 2020, from 270,000 metric tons to 450,000 metric tons. Current Cameroonian annual consumption is 385,000 metric tons. The Government of Cameroon has set price controls on palm oil and palm kernel oil estimated at €0.69 a kilo for industry sales. In 2015, the government banned palm oil imported from Malaysia and Indonesia.

The CDC's palm oil, rubber, and banana land bank currently is 15,240 ha, 22,262 ha, and 4,525 ha respectively. CDC's rubber is sold to global buyers, including Michelin. Its bananas are sold to Del Monte and Fruitier. It is unclear how many of the zero-deforestation procurement policies established by 210 corporations worldwide would apply toward Cameroonian agriculture exports.

Earlier this year, the Government of Cameroon nationalized CDC. It is now solely owned by the government and operates under technical supervision of the Ministry of Agriculture and Rural Development. It is currently the nation's largest state-owned agribusiness. CDC is also the second largest employer in Cameroon, employing more than 22,000 people. The company is facing significant cash flow constraints given that rubber prices have dropped about 50% since 2012 and its palm oil production costs are reported to exceed palm oil revenue by 25%.

Palm oil development in Cameroon is not without its controversy. On September 27, 2016, two collective complaints involving 244 farmers were filed with the Government of Cameroon against SG Sustainable Oils Cameroon (SGSOC). SGSOC's 20,000 ha palm oil plantation is alleged to occupy lands belonging to local farms. It also appears that SGSOC has failed to obtain free, prior, and informed consent from the villagers. Some of these lands are considered High Carbon Stock and/or High Conservation Value forest.

SGSOC's 3-year provisional land lease on its 20,000 ha concession is currently set to expire in November, 2016. It is unknown if SGSOC will seek to renew. SGSOC's palm oil plantation, formerly owned by Herakles Farms, has been supported by U.S. investor Blackstone Group (BX:US) through its subsidiary Sithe Global Power, but this relationship is not transparently described within security filings.

This research is a product of Chain Reaction Research, a consortium effort of AidEnvironment, Climate Advisers, and Profundo.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Article written by Chain Reaction Research.

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