PP 7767/09/2010(025354)

RHB Research

Malaysia
Corporate Highlights Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

R esults /Brie fing No te

27 August 2010
MARKET DATELINE

Sime Darby Share Price

Fair Value
:
:
RM7.88
RM8.35
Kitchen Sinking Done – Whats Next? Recom : Market Perform
(Upgraded)

Table 1 : Investment Statistics (SIME; Code: 4197) Bloomberg: SIME MK

Net Core EPS Cons. Net
FYE Turnover profit EPS gth PER EPS* P/NTA P/CF* ROE Gearing GDY
Jun (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)
2010 32,951.6 2,676.9 44.5 18.7 17.7 - 2.3 10.4 3.6 12.5 1.3
2011f 36,107.1 2,842.3 47.3 6.2 16.7 52.0 2.3 12.0 12.5 23.4 3.7
2012f 39,802.9 2,991.0 49.8 5.2 15.8 56.0 2.1 11.3 12.4 25.5 4.3
2013f 44,413.4 3,231.0 53.8 8.0 14.7 - 2.0 10.5 12.6 26.7 4.4
Main Market Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ Excluding EI, above our forecasts. Sime Darby’s FY06/10 core net RHBRI Vs. Consensus
profit came in above our expectations, at 115% of our forecasts. In Above
4QFY10, Sime recorded more EI losses for the E&U division of RM777.3m, In Line
which include RM213m in write-offs for its groundwater project; RM61.2m Below

of losses for impairment in investment in the healthcare sector and Issued Capital (m shares) 6,009.4
RM18.2m in unrealised forex losses, bringing total EI loss for FY10 to an Market Cap RMm) 47,354.1
estimated RM1.95bn. Management did not breakdown the EI losses for the Daily Trading Vol (m shs) 11.7
E&U division by project, as it did not want to jeapordise its VO recovery. 52wk Price Range (RM) 7.47-9.24
Major Shareholders: (%)
♦ EBIT improvement overall. Core net profit rose 19% yoy in FY10 on the Skim Amanah Saham
back of a 6% yoy increase in turnover, while EBIT rose 21% yoy. The Bumiputra 30.9
Permodalan Nasional Bhd 17.0
improvement in EBIT came from higher margins in the plantations division
Employees Provident Fund 11.7
due to higher CPO prices achieved and lower CPO production costs (est -
3% yoy) and turnaround to profitability for downstream division; higher FYE June FY11 FY12 FY11
margins in the property segment due to better product mix; higher EPS chg (%) (2.1) (2.1) -
Var to Cons (%) (9.0) (11.1) -
margins in the motor division due to turnaround in profitability for
Australia/NZ region and better economies of scale; and higher margins in PE Band Chart
the energy & utilities division (ex-EI) due to improved margins in the
PER = 22x
power & utilities sub-segment. This was offset slightly by lower margins in PER = 19x
PER = 16x
the heavy equipment division due to weaker sales volume and lower PER = 13x
economies of scale.
♦ Three key takeaways from the analyst briefing: The analyst briefing
focused primarily on Sime’s oil and gas division provisions and the strategy
going forward with the new CEO at the helm. The key points from the
briefing include: (1) strategic direction set forth by new CEO; (2) more
Relative Performance To FBM KLCI
clarity on the provisions made in the E&U division this quarter and what to
expect going forward; and (3) expectation for plantation divisions.
FBM KLCI
♦ Risks include: (1) a convincing reversal in crude oil price trend resulting in
reversal of CPO and other vegetable oils price trend; (2) weather
abnormalities resulting in an over or under supply of vegetable oils; 4) Sime Darby
increased emphasis on implementing global biofuel mandates and trans-fat
policies; and 5) a slower-than-expected global economic recovery,
resulting in lower-than-expected demand for vegetable oils.
♦ Forecasts and investment case. Post-results, we have tweaked our
forecasts downwards slightly by around 2% and introduce our FY13
forecast. However, we raise our fair value to RM8.35 (from RM8.00), after
updating for Sime’s latest net debt balance and after reducing our holding
company discount to 20% (from 25%). We believe the worst is over for Hoe Lee Leng
(603) 92802184
Sime and expect it to trade in line with the market now. As such, we
hoe.lee.leng@rhb.com.my
upgrade our recommendation to Market Perform (from Underperform).

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Table 2 : Quarterly Results Breakdown
FYE June (RMm) 4Q09 3Q10 4Q10 % qoq % yoy FY09 FY10 % yoy Comment

Turnover 7,535.0 7,570.7 9,211.8 22 22 31,013.9 32,951.6 6 See Segmental Breakdown

EBIT 954.3 933.8 891.3 (5) (7) 3,126.1 3,775.9 21 See Segmental Breakdown
Margin (%) 12.7 12.3 9.7 10.1 11.5
Investmt and interest 36.6 27.1 32.7 21 (11) 158.7 108.3 (32)
inc
Interest Expense (57.0) (71.1) (72.5) 2 27 (252.6) (278.4) 10
Associates & JV 40.4 28.7 30.1 5 (25) 14.5 85.8 492
EI 133.4 (967.4) (856.6) (11) (742) 24.9 (1,950.1) n.m. Includes provisions for E&U division of
RM1.7bn for Qatar, Maersk Oil, Marine
and Bakun project (associate),
RM21.5m net unrealised exchange
loss unrealised forex loss, RM61.2m
impairment of investment in
healthcare sector, RM213m
impairment loss for groundwater
project and slightly offset by some EI
gains totalling est RM46m
Pretax profit 1,107.7 (48.9) 25.0 (151) (98) 3,071.6 1,741.5 (43) Flow through from EBIT and EI
distortion
PBT Margin (%) 14.7 (0.6) 0.3 9.9 5.3
Taxation (98.4) (228.6) (78.3) (66) (20) (730.8) (886.7) 21 Higher as provision for cost overruns
in energy & utilities division not tax-
deductible.
Eff. rate (%) 8.9 (467.5) 313.2 23.8 50.9
Minorities (25.3) (31.1) (24.1) (23) (5) (60.7) (128.0) 111
Net profit 984.0 (308.6) (77.4) (75) (108) 2,280.1 726.8 (68) Flow through from PBT and higher
effective tax rates
Net margin (%) 13.1 (4.1) (0.8) 7.4 2.2
Net Profit (ex-EI) 850.6 658.8 779.2 18 (8) 2,255.2 2,676.9 19
EPS (sen) 16.4 (5.1) (1.3) (75) (108) 37.9 12.1 (68)

DPS (sen) 15.3 - 3.0 20.3 10.0

T/O BREAKDOWN
Plantations 2,162.7 2,524.0 2,876.2 14 33 10,657.9 10,857.7 2 Increase mainly due to higher
contribution from downstream
operations and higher CPO price
(+6% yoy), offset slightly by lower
FFB production (-0.2% yoy)
Property 514.4 520.0 588.2 13 14 1,407.5 1,784.5 27 Increase from higher property sales in
Klang Valley (+31% yoy), offset
slightly by lower sales from hospitality
sub-division (-2% yoy)
Heavy Equipment 1,951.2 1,873.1 2,271.0 21 16 7,870.1 8,231.3 5 Improvement in demand from
China/HK (+32% yoy), Malaysia
(+2% yoy) and Australia (+3% yoy),
offset by reduction in sales to South-
East Asia (-18% yoy)
Motor 2,188.4 2,374.9 2,998.8 26 37 7,510.3 10,068.2 34 Higher sales from China/HK (+50%
yoy), Malaysia (+39% yoy), South
East Asia (+21%) yoy and
Australia/NZ (+16% yoy)
Energy & Utilities 613.5 160.1 353.3 121 (42) 2,939.4 1,510.1 (49) Lower sales from oil and gas (-62%
yoy), offset slightly by +17% yoy
revenue from power & utilities division
Others 104.8 118.6 124.3 5 19 628.7 499.8 (21)
Total 7,535.0 7,570.7 9,211.8 22 22 31,013.9 32,951.6 6

EBIT BREAKDOWN
Plantations 544.7 435.8 388.9 (11) (29) 1,795.8 2,097.8 17 Higher margins due to higher CPO
prices achieved and lower CPO
production costs (est -3% yoy) and
turnaround to profitability for
downstream division
Property 133.5 195.8 136.5 (30) 2 321.2 451.5 41 Higher margin due to better product
mix
Heavy Equipment 225.8 159.7 213.3 34 (6) 849.5 747.9 (12) Lower margins due to weaker sales
volume and lower economies of scale
Motor 42.4 84.7 174.4 106 311 178.1 374.9 110 Higher margins due to turnaround to
profitability for Australia/NZ region
and better economies of scale
Energy & Utilities (91.5) 25.6 (4.6) (118) (95) 23.3 120.5 417 Excludes EI. Higher margins due to
improved margins in power & utilities
sub-segment, as raw material costs
fell in FY10
Others (60.4) 50.0 10.5 (79) (117) (55.3) 86.3 (256)
Unallocated expenses 159.8 (17.8) (27.7) 56 (117) 13.5 (103.0) (863)
Total (ex-EI) 954.3 933.8 891.3 (5) (7) 3,126.1 3,775.9 21
EI 133.4 (967.4) (856.6) (11) (742) 24.9 (1,950.1) n.m. See above
Total 1,087.7 (33.6) 34.7 (203) (97) 3,151.0 1,825.8 (42)

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 Table 3. Plantation Statistics
FYE Jun FY09 FY10 % yoy
Plantation stats
FFB Prdtn ('m tonnes) 9.9 9.8 0
- Malaysia 6.9 6.6 -5
- Indonesia 3.0 3.3 10
FFB Yield (t/ha) 20.6 20.6 0
- Malaysia 22.9 22.3 -3
- Indonesia 16.6 18.0 8
CPO Prdtn ('m tonnes) 2.3 2.3 1
- Malaysia 1.5 1.5 -2
- Indonesia 0.8 0.9 11
CPO OER (%) 21.5 21.9 2
- Malaysia 21.1 21.3 1
- Indonesia 22.4 23.0 3
Ave CPO selling price (RM/t) 2,177 2,311 6
- Malaysia 2,264 2,342 3
- Indonesia 2,013 2,260 12
PK OER (%) 5.0 4.9 -2
- Malaysia 5.1 5.0 -2
- Indonesia 4.6 4.7 2
Ave PK selling price (RM/t) 1,069 1,150 8
- Malaysia 1,164 1,252 8
- Indonesia 848 958 13

Source: Company, RHB

Briefing Notes

♦ Key takeaways. The analyst briefing focused primarily on Sime’s oil and gas division provisions and the strategy
going forward with the new CEO at the helm. The key points from the briefing include: (1) strategic direction set
forth by new CEO; (2) more clarity on the provisions made in the E&U division this quarter and what to expect
going forward; and (3) expectation for plantation divisions

♦ Strategic plan revealed. Sime’s new Group Chief Executive Dato’ Mohd Bakke Salleh went through his new
strategic plan for the company going forward, which included: (1) Strengthening internal controls, (2)
Establishing a new governance structure to be implemented from 1 Jan 2011, where each division will be headed
by a flagship company which will have a separate Board of Directors and Committee; (3) Addressing weaknesses
in the oil and gas division and turning it around; and (4) Making new management level changes, amongst others
– which we understand has included the appointment of 3 new Board Members and the appointment of a new
Head for the Strategy division – Alan Hamzah, an ex-Sime alumni member. The four key thrusts highlighted by
Dato Bakke include the turning around of the E&U division, the maximising of potential of its core businesses,
establishing a high performance culture and reviewing its portfolio mix. With regards to any potential for
disposals or hiving off of one or more its core businesses, management indicated that any decision on this would
be made in 1QCY2011. As for Simes KPIs for FY11, this will only be revealed in Nov, upon the release of its
1QFY11 results.

♦ Worst over for E&U division? For the energy & utilities division, management noted that there was an
additional RM773m of EI provision made in 4QFY10 relating to the three existing oil and gas projects, namely
Qatar Petroleum, Maersk Oil Qatar and Marine, two ongoing projects for ONGC India, as well as RM213m in write-
offs for the groundwater project, Management did not want to disclose the breakdown of provisions between the
3 oil and gas projects, as it believed this would jeapordise its capacity to recover any outstanding VOs. After
having appointed technical consultants to re-cost the existing projects, management believes that the provisions
made this quarter would encompass any cost overruns to completion and does not expect any further cost
overruns for these projects in the future. The provisions included for its two new ONGC projects have included
penalties for late delivery, as management indicated that based on the existing schedule, Sime would find it a
major challenge to meet the current deadline. Note that the first part of the project (the RM450m wellhead
platform project) is 30% complete, while the second part of the project (the RM1.6bn process platform) is only at
the design stage now. Going forward, management has reiterated that for new O&G projects, it will concentrate
on what it is good at, i.e. EPC projects only and not attempt to do more EPCIC projects, unless it ties up with a
capable partner. For the groundwater project, management noted that the decision was made to write off the
entire investment cost of the project, as the investment return on this project is no longer attractive, as the
capital outlay has risen 44% to RM2.3bn (up from the originally touted RM1.6bn two years ago).

♦ Improving yields to be seen next year. Coming from a disappointing year on the production front, where FFB
production fell 0.2% yoy, management expects to be able to see a recovery for production in FY11 of
approximately 6-7%. This is expected to come from an FFB yield improvement of 5-6% for Malaysia and about

Page 3 of 6

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 10% for Indonesia. As for whether it is seeing any impact of the labour shortages in Malaysia, management
admitted that this was the case, but that it does not expect to see a significant impact to its harvesting activities
in FY11, as it has increased its incentives to its existing harvesters. Despite this, we prefer to maintain our more
conservative FFB growth target of 4-5% for FY11-12, followed by a stronger 6-6.5% growth for FY13 for now.

♦ Good impression of Dato’ Bakke. All in, we were relatively impressed with Dato’ Bakke’s seemingly focused
approach at addressing the issues at hand and his down-to-earth way of facing the problems head-on. We believe
this quarter was a kitchen-sinking quarter for Sime and are looking forward to relatively blemish-free quarters
ahead, at least for the oil & gas division. While we could see more “cleaning up” activities going forward
pertaining to Sime’s other smaller projects in other divisions, we do not expect the impact of these to be
significant. We believe implementation is key, however, and expect Dato’ Bakke to have his hands full with this
job in the medium term. We believe regaining the trust of Sime’s investors, customers, suppliers etc will take
time and this is the hurdle that will be hard to cross going forward, as it could impede upon Sime’s ability to
obtain new lucrative projects or jobs in the future.

Risks

♦ Risks to our view. Main risks include: (1) a convincing reversal in crude oil price trend resulting in reversal of
CPO and other vegetable oils price trend; (2) weather abnormalities resulting in an over or under supply of
vegetable oils; 4) increased emphasis on implementing global biofuel mandates and trans-fat policies; and 5) a
slower-than-expected global economic recovery, resulting in lower-than-expected demand for vegetable oils.

Forecasts And Assumptions

♦ Forecasts. Post-results, we have tweaked our forecasts downwards slightly by around 2% and introduce our
FY13 forecast.

Valuations And Recommendation

♦ Upgrade to Market Perform. Post-earnings revision, we raise our fair value to RM8.35 (from RM8.00), after
updating for Sime’s latest net debt balance and after reducing our holding company discount to 20% (from 25%).
We believe the worst is over for Sime and expect it to trade in line with the market now, rather than
underperform the market. As such, we upgrade our recommendation to Market Perform (from Underperform).

Table 4. Sum-Of-Parts Breakdown

Division Valuation method Value (RMm)
Plantations CY11 PE 16x 42,067.1
Property CY11 PE 12x 7,137.1
Motor CY11 PE 12x 3,530.6
Heavy Equipment CY11 PE 12x 10,189.1
Energy & Utilities CY11 PE 12x 2,701.2
Others CY11 PE 12x 237.8
Net Cash / (Debt) End 3QFY10 (2,556.3)
TOTAL 62,675.9

No. issued shares 6,009.4

SOP/share (RM) 10.43

Less: Holding co discount 20% (2.09)

Fair Value/share (RM) 8.34

Source: RHBRI

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 Table 5. Earnings Forecasts Table 6. Forecast Assumptions
FYE Jun (RMm) FY10 FY11F FY12F FY13F FYE Jun FY11 FY12F FY13F

Turnover 32,951.6 36,107.1 39,802.9 44,413.4 CPO Price (RM/tonne) 2,600 2,500 2,500
Turnover growth (%) 6.2 9.6 10.2 11.6 FFB Production Gth (%) 4.7 4.2 6.3

Operating Costs (29,175.7) (33,151.5) (36,728.7) (41,133.8) Heavy Equipmt Op Profit Gth 2.4 16.1 10.0
(%)
Operating Profit 3,775.9 4,136.3 4,375.7 4,731.9 Energy & Utilities Op Profit n.m. 21.3 16.4
Gth (%)
Property Op Profit Gth (%) 25.5 10.0 10.0
EBITDA 4,669.3 5,239.4 5,578.9 6,029.8 Motor Op Profit Gth (%) (5.2) 5.0 5.0
EBITDA margin (%) 14.2 20.3 21.3 22.3

Depreciation (893.4) (1,103.1) (1,203.2) (1,297.9)

Net Interest (170.1) (266.7) (307.1) (337.0)
Associates 85.8 90.0 99.0 108.9
Exceptionals (1,950.1) 0.0 0.0 0.0

Pretax Profit 1,741.5 3,989.1 4,197.9 4,534.7

Tax (886.7) (997.3) (1,049.5) (1,133.7)
PAT 854.8 2,991.8 3,148.4 3,401.0
Minorities (128.0) (149.6) (157.4) (170.1)
Discontinued ops 0.0 0.0 0.0 1.0
Net Profit 726.8 2,842.3 2,991.0 3,231.0
Core Net Profit 2,676.9 2,842.3 2,991.0 3,231.0

Source: Company data, RHBRI estimates

Chart 1: Sime Technical View Point

♦ The share price of Sime enjoyed a smooth rally from
a lower region of RM5.40 in Mar 2009 to a high of
RM9.19 in Jan 2010.

♦ However, as it failed to sustain at above the RM9.00

tough resistance level, it fell into a consolidation
mode shortly afterward.

♦ The stock tried to recover in Mar and Apr 2010, but

failed to even get closer to the RM9.00 resistance.
As a result, it reversed with a steep fall in May to a
low of RM7.47.

♦ But, over the months, the stock has found

difficulties to cut across the RM8.00 immediate
resistance level. It closed yesterday at RM7.88.

♦ Though it has recorded a small bullish candle

yesterday, it merely erased the huge bearish candle
registered a day earlier on the chart.

♦ But the 10-day SMA managed to overcome the 40-

day SMA on the upside in recent trading, indicating
a potential positive turn in the medium-term
outlook, but the mixed momentum readings on the
chart suggest further confirmation needed for the
technical to turn around.

♦ Only if it manages to surpass the RM8.00 level will it

trigger a decent technical rebound ahead, in our
view. On the other hand, a slip to below the RM7.47
recent low level will spell further selling in the near
term.

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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. The
opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or
be 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 be
construed 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 any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons
may 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 objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or
strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts
any 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 providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB
Group 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 equity
securities 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 other
services 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 reflect
information 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 based
upon 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 : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended
securities, subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the
actions of third parties in this respect.

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