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Sime Darby Berhad : Clarification On Cost Overrun At Bakun - 7/5/2010

Sime Darby Berhad : Clarification On Cost Overrun At Bakun - 7/5/2010

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Published by Rhb Invest
♦ Clarification on cost overrun at Bakun. Following on from our bulletin board comment yesterday and news update on 5 May regarding media reports that Sime Darby has incurred RM1-1.7bn in cost overruns from the Bakun hydro-electric dam project, we highlight that Sime Darby has a 35.7% stake in the Malaysia-China Hydro JV consortium and that construction works are already 96% completed.
♦ Clarification on cost overrun at Bakun. Following on from our bulletin board comment yesterday and news update on 5 May regarding media reports that Sime Darby has incurred RM1-1.7bn in cost overruns from the Bakun hydro-electric dam project, we highlight that Sime Darby has a 35.7% stake in the Malaysia-China Hydro JV consortium and that construction works are already 96% completed.

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Published by: Rhb Invest on May 07, 2010
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10/24/2012

 
 
Page 2 of 2
A comprehensive range of market research reports by award-winning economists and analysts are exclusivelyavailable for download from
w w w .rhbinvest.com 
 
Table 1 : Investment Statistics (SIME; Code: 4197) Bloomberg: SIME MKNet Core EPS Cons. NetFYE Turnover profit EPS Growth PER EPS* P/NTA P/CF* ROE Gearing GDYJun (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)2009
31,013.9 2,255.2 37.5 (38.1) 22.9 - 2.6 16.8 10.6 10.7 2.6
2010f 
31,855.9 2,377.5 39.6 5.4 21.7 45.0 2.6 15.3 10.9 17.2 2.6
2011f 
35,294.9 2,904.6 48.3 22.2 17.8 54.0 2.4 12.9 12.6 20.1 3.4
2012f 
39,784.0 3,056.2 50.9 5.2 16.9 59.0 2.3 12.1 12.7 24.1 4.0
Main Market Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates
 
Clarification on cost overrun at Bakun.
Following on from ourbulletin board comment yesterday and news update on 5 Mayregarding media reports that Sime Darby has incurred RM1-1.7bn incost overruns from the Bakun hydro-electric dam project, we highlightthat Sime Darby has a 35.7% stake in the Malaysia-China Hydro JVconsortium and that construction works are already 96% completed.
 
Final figure likely to be revealed in 3QFY06/10 results?
Sime hasbeen receiving periodic payments and agreed claims from theGovernment. In the past, some cost overruns were incurred due toincrease in material costs and variations in design but these have beendealt with, as Sime has made provisions of RM130m for its share of cost overruns so far. We understand the task force set up toinvestigate the oil and gas division is closing next week (12 May) andany provision that needs to be made will likely be done in theupcoming 3QFY06/10 results (due end-May). While Sime has notfinalised the total cost overrun figure yet, the figure is likely to belower than the RM1.7bn quoted in the press.
 
Impact: 7-9% off bottomline and 3 sen to fair value.
As thegovernment has given RM700m to the consortium for part of the costoverruns already and assuming the remaining RM1bn is provided for,Sime’s share is RM357m, based on its 35.7% stake. Deducting theRM130m provision already made, this would mean another RM227m inprovisions, which would shave off 7-9% from Sime’s bottomline inFY10 and 3 sen/share from its SOP-based fair value.
 
Forecasts.
Unchanged, as we deem the potential provision as an EI.
 
Risks
: 1) Reversal in crude oil price trend resulting in reversal of CPOand other vegetable oils price trend; 2) Weather abnormalities; 3)Change in emphasis on implementing global biofuel mandates; and 4)Slower-than-expected global economic recovery.
 
 
Investment case.
While we understand the current selldown of Sime’s shares may be due to lack of transparency, we believe thetaskforce and management changes in the division is a sign that thecompany is taking these issues seriously. Sime’s share price has fallenby RM0.18/share (from RM8.76 when the news broke), or a loss inmarket value of RM1.08bn. This is 4-5x higher than the amount of provision required for the project and is, we believe, an overreaction.We would advise investors to wait out the storm and take theopportunity to buy the shares on weakness at a later stage. Maintain
Outperform
with unchanged fair value of RM9.70/share.
 
Corporate Highlights 
Company Update
Sime Darby
Clarification On Cost Overrun At Bakun
Share Price : RM8.58Fair Value : RM9.70Recom :
Outperform
(Maintained)
Issued Capital (m shares) 6,009.4Market Cap (RMm) 51,560.7Daily Trading Vol (m shs)11.752wk Price Range (RM)6.25-9.24Major Shareholders: (%)Skim Amanah SahamBumiutra30.9Permodalan Nasional Bhd 17.0Employees Provident Fund 11.7
FYE June FY10 FY11 FY12
EPS chg (%) - - -Var to Cons (%) (12.1) (10.5) (13.8)
PE Band ChartRelative Performance To FBM KLCI
Hoe Lee Leng(603) 92802184hoe.lee.leng@rhb.com.my
7 May 2010
RHB ResearchInstitute Sdn Bhd
A member of theRHB Banking Group
Company No: 233327 -M
   M  a   l  a  s  i  a
   M   A   R   K   E   T   D   A   T   E   L   I   N   E
 
   P   P    7   7   6   7   /   0   9   /   2   0   1   0   (   0   2   5   3   5   4   )
Please read important disclosures at the end of this report.
 
Sime Darby
 
FBM KLCI
 
PER = 16x
 
PER = 14x
 
PER = 12x
 
 
7 May 2010
 
Page 2 of 2
A comprehensive range of market research reports by award-winning economists and analysts are exclusivelyavailable for download from
w w w .rhbinvest.com 
 
Table 2. Sum-Of-Parts BreakdownDivision Valuation method Value (RMm)
Plantations CY10 PE 18x 43,216.9Property CY10 PE 14x 5,310.3Motor CY10 PE 14x 3,168.5Heavy Equipment CY10 PE 14x 11,210.8Energy & Utilities CY10 PE 16x 3,841.6Others CY10 PE 14x 272.0Net Cash / (Debt) End 2QFY10 (2,098.0)
TOTAL 64,922.1
No. issued shares 6,009.4
SOP/share (RM) 10.80
Less: Holding co discount 10% (1.08)
Fair Value/share (RM) 9.72
Source: RHBRI
Table 3. Earnings Forecasts Table 4. Forecast AssumptionsFYE Jun (RMm) FY09a FY10F FY11F FY12F FYE Jun FY10 FY11F FY12FTurnover 31,013.9 31,855.9 35,294.9 39,784.0
CPO Price (RM/tonne) 2,450 2,600 2,500Turnover growth (%) (8.9) 2.7 10.8 12.7 FFB Production Gth (%) 0.5 2.5 1.6Operating Costs (28,901.9) (29,435.7) (32,218.7) (36,597.1) Heavy Equipmt Op Profit Gth(%)(14.2) 19.6 15.8Operating Profit 3,126.1 3,461.9 4,230.2 4,487.7 Energy & Utilities Op ProfitGth (%)314.0 13.6 8.6Property Op Profit Gth (%) 16.4 26.1 18.4
EBITDA 3,944.3 4,459.4 5,333.4 5,690.9
Motor Op Profit Gth (%) 24.0 5.0 5.0EBITDA margin (%) 18.3 19.3 20.3 21.3Depreciation (818.2) (997.5) (1,103.1) (1,203.2)Net Interest (93.9) (169.3) (243.6) (297.3)Associates 14.5 100.0 90.0 99.0Exceptionals 24.9 0.0 0.0 0.0
Pretax Profit 3,071.6 3,392.6 4,076.7 4,289.5
Tax (730.8) (916.0) (1,019.2) (1,072.4)PAT 2,340.8 2,476.6 3,057.5 3,217.1Minorities (60.7) (99.1) (152.9) (160.9)Discontinued ops 0.0 0.0 0.0 0.0
Net Profit 2,280.1 2,377.5 2,904.6 3,056.2Core Net Profit 2,255.2 2,377.5 2,904.6 3,056.2
Source: Company data, RHBRI estimates
IMPORTANT DISCLOSURES
This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. Theopinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ orbe contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to beconstrued as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in anymanner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated personsmay from time to time have an interest in the securities mentioned by this report.This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectivesof persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluateparticular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment orstrategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents acceptsany liability for any loss or damage arising out of the use of all or any part of this report.RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providinginvestment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHBGroup may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equitysecurities or loans of any company that may be involved in this transaction. “Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or otherservices from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflectinformation known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation basedupon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.The recommendation framework for stocks and sectors are as follows : -

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