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Sime Darby profits soar, before spin-off of world's top palm business

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Profits at the Malaysian conglomerate Sime Darby Berhad soared off the back of rising palm oil prices, even as the company plans to spin out its plantations business, the world's largest by area under cultivation.

The company benefitted from rising palm production, even as prices remain supported by the industry wide effect of the 2015-16 El Nino continues to suppress production and support prices.

In particular the company's plantations in Papua New Guinea delivered rising volumes.

The company also clarified its plans for a planned spin out of its plantations and property business, in a plan that would establish three completely separate businesses, with no stake in each other.

Rising palm oil prices

Earnings from Sime Darby's palm oil business leapt higher, with pre-tax profits up nearly fourfold, to 568m ringgits, compared to 159m ringgits a year ago.

"This was mainly due to higher average CPO price realised and better fresh fruit bunch production in the current period, especially in Indonesia and Papua New Guinea," Sime Darby said.

The palm oil division realised crude palm oil prices of 2,835 ringgit a tonne, compared to 2,066 ringgit a tonne a year earlier.

"The price increase was mainly driven by an industry-wide production deficit due to the lingering effects of 2015's El Nino weather phenomenon," Sime Darby said.

But for Sime Darby, production rose by 5%, with the bggest growth seen in the company's Papuan plantations.

Profits from palm oil marketing also rose, thanks to a strategy of focusing on high margin products, as well as higher prices.

Profits soar

The higher palm oil returns helped Sime Darby grow its pre-tax profit by 94%, to 921m ringgit, with net profits up 126% to 644m riggit, over the three months to December 31.

"This significant improvement in our earnings can be attributed largely to the increase in crude palm oil prices and better production of fresh fruit bunches over the period in review," said Tan Sri Dato' Seri Mohd Bakke Salleh, president and chief executive of Sime Darby.

And the company also announced a planned restructuring, ahead of its planned spin-off of the plantation and property business, which is planned to be completed this year.

No new capital raised

The plan involves the creation of two new listed companies, comprising the property and planation businesses, the shares of which will be distributed to existing shareholders, with no new capital raised.

Sime Darby Berhad, which will retain its industrial, motors, logistics and healthcare divisions, will receive no money or shares from the new companies.

"The intended corporate structure is aimed at maximising the value for shareholders who will eventually hold shares in three exciting pure plays," Sime Darby said.

Threat to credit rating

Earlier this month Fitch Ratings warned about such a spin-off plan.

"Fitch does not expect Sime Darby's consolidated credit profile to be affected if it retains a majority stake in the plantation and property units upon listing, as this would imply that linkages remain intact," the ratings agency said.

"However, should Sime Darby lose its controlling stakes in the units, with the intention of creating independent plantation and property-focused entities with minimal operational or strategic overlap with the remaining business, Sime Darby's cash flows would be significantly reduced and it would likely see higher earnings volatility, leading to a weaker business profile," Fitch said, adding that it sees a risk to the company's rating "in such a scenario".

By William Clarke

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