PP 7767/09/2010(025354)

RHB Research

Malaysia Corporate Highlights Institute Sdn Bhd

A member of the
RHB Banking Group
Company No: 233327 -M

Com pany Upda te

14 May 2010
MARKET DATELINE

Sime Darby Share Price

Fair Value
:
:
RM8.65
RM7.95
Eroding Investor Confidence Recom : Underperform
(Downgraded)

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

Net Core EPS Cons. Net
FYE Turnover profit ^ EPS Growth PER EPS* P/NTA P/CF* ROE Gearing GDY
Jun (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)
2009 31,013.9 2,255.2 37.5 (38.1) 23.0 - 2.7 16.9 10.6 10.7 2.5
2010f 31,855.9 2,404.1 40.0 6.6 21.6 45.0 2.7 15.3 6.7 22.5 2.5
2011f 35,294.9 2,904.6 48.3 20.8 17.9 54.0 2.6 13.0 13.2 25.2 3.4
2012f 39,784.0 3,056.2 50.9 5.2 17.0 59.0 2.4 12.2 13.2 29.2 3.9
Main Market Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates ^ Normalised

♦ Additional provisions of RM964m. Sime Darby announced that it

Issued Capital (m shares) 6,009.4
has decided to make an additional RM964m in provisions for four
Market Cap (RMm) 51,981.3
projects, namely: (1) Bulhanine and Maydan Mahzam project with
Daily Trading Vol (m shs) 11.7
Qatar Petroleum (QP) – RM200m; (2) Maersk Oil Qatar project (MOQ)
52wk Price Range (RM) 6.25-9.24
– RM159m; (3) Marine project involving the construction of vessels for Major Shareholders: (%)
use in the MOQ Project – RM155m and (4) Bakun hydroelectric dam Skim Amanah Saham
project – RM450m (see Table 2). Bumiputra 30.9
Permodalan Nasional Bhd 17.0
♦ Management changes. Concurrently, the Board has asked CEO Dato' Employees Provident Fund 11.7
Seri Ahmad Zubir to take a leave of absence prior to the expiry of his
FYE June FY10 FY11 FY12
contract on 26 Nov, while Dato’ Azhar Abdul Hamid, currently the head
EPS chg (%) (39.4) - -
of the plantations division, has been appointed as acting CEO. Mr
Var to Cons (%) (11.1) (10.5) (13.8)
Franki Anthony Dass, currently the head of the Indonesian plantation
division has been appointed Acting Head of the Plantation division. PE Band Chart

♦ Reduces FY10 earnings by 39.4%, but issue is confidence. We

PER = 16x
PER = 14x
expect these provisions to erode Sime’s earnings by 39.4% for PER = 12x

FY06/10. While the Bakun dam provision is not a surprise (albeit

higher-than-expected), the provisions for other projects are a surprise.
Although management expects these provisions to be the worst-case
scenario and one-off, we believe this could affect confidence in the
management. We believe this provision will also raise questions about
Sime’s other divisions.
Relative Performance To FBM KLCI
♦ Forecasts reduced by 39.4% for FY10, but FY11-12 unchanged.
♦ Risks: 1) Reversal in crude oil price trend resulting in reversal of CPO
and other vegetable oils price trend; 2) Weather abnormalities; 3) Sime Darby

Change in emphasis on implementing global biofuel mandates; 4)

Slower-than-expected global economic recovery; and 5) More
provisions. FBM KLCI

♦ Investment case. Although the inclusion of the RM964m provision

would only reduce our SOP-based fair value by RM0.16/share, we
reduce our fair value to RM7.95 (from RM9.70), after reducing the Sime Darby
target PE for Sime’s energy & utilities division to 13x CY10 (from 16x),
taking into account the higher risk associated with this division, and
after raising our holding company discount to 25% (from 10%). We
downgrade our recommendation to Underperform (from outperform)
Hoe Lee Leng
as we believe investor sentiment and confidence in management will (603) 92802184
be severely damaged. For a large-cap index-linked stock, this is very hoe.lee.leng@rhb.com.my
important, especially for foreign funds, which now hold about 14.7% of
Sime Darby.

Please read important disclosures at the end of this report. Page 1 of 4

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 14 May 2010

Table 2. Breakdown of Provisions Required

Project Findings Provision
RMm
Reversal of RM200m revenue previously recognized in
1 Qatar Petroleum accounts in FY09 – on the assumption no VO will be 200
received.
Project already completed and handed over.

Out of total cost overruns and delay costs of RM526m,

2 Maersk Oil Qatar 159
RM367m has already recognised in 1HFY06/10.
Recognition of remaining RM159m in cost overruns, on
the assumption that no VO will be received. Project was
96% completed as at end Feb-2010.

Provision of RM155m for total cost of two tug boats and

3 Marine
a Derrick lay barge for use in the MOQ project, as these 155
vessels have not been delivered.
This provision is the cost of "walking away" from the
vessels, which need to be repaired and upgraded in
order to be used.

Cost overrun and delay provisions of an additional

4 Bakun dam 450
RM450m based on Sime's 35.7% stake.
Project was 96% completed as at beg-May 2010, and
this provision is based on cost-to-completion.

TOTAL 964

Chart 1. Breakdown of Energy & Utilities Division EBIT Contributions

140%

120%

100%
EBIT Co ntribu tio n (% )

80%

60%

40%

20%

0%

-20%

-40%
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 1Q10 2Q10

Pow er & Utilities Oil and Gas

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 14 May 2010

Table 3. Sum-Of-Parts Breakdown

Division Valuation method Value (RMm)
Plantations CY10 PE 18x 43,216.9
Property CY10 PE 14x 5,310.3
Motor CY10 PE 14x 3,168.5
Heavy Equipment CY10 PE 14x 11,210.8
Energy & Utilities CY10 PE 13x 2,637.5
Others CY10 PE 14x 272.0
Net Cash / (Debt) End 2QFY10 (2,098.0)
TOTAL 63,718.0

No. issued shares 6,009.4

SOP/share (RM) 10.60

Less: Holding co discount 25% (2.65)

Fair Value/share (RM) 7.95

Source: RHBRI

Table 4. Earnings Forecasts Table 5. Forecast Assumptions

FYE Jun (RMm) FY09a FY10F FY11F FY12F FYE Jun FY10F FY11F FY12F

Turnover 31,013.9 31,855.9 35,294.9 39,784.0 CPO Price (RM/tonne) 2,450 2,600 2,500
Turnover growth (%) (8.9) 2.7 10.8 12.7 FFB Production Gth (%) 0.5 2.5 1.6

Operating Costs (28,901.9) (29,435.7) (32,218.7) (36,597.1) Heavy Equipmt Op Profit Gth (14.2) 19.6 15.8
(%)
Operating Profit 3,126.1 3,461.9 4,230.2 4,487.7 Energy & Utilities Op Profit 314.0 13.6 8.6
Gth (%)
Property 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 5.0
EBITDA margin (%) 18.3 19.3 20.3 21.3

Depreciation (818.2) (997.5) (1,103.1) (1,203.2)

Net Interest (93.9) (186.4) (273.2) (327.6)
Associates 14.5 100.0 90.0 99.0
Exceptionals 24.9 (964.0) 0.0 0.0

Pretax Profit 3,071.6 2,411.5 4,076.7 4,289.5

Tax (730.8) (911.4) (1,019.2) (1,072.4)
PAT 2,340.8 1,500.1 3,057.5 3,217.1
Minorities (60.7) (60.0) (152.9) (160.9)
Discontinued ops 0.0 0.0 0.0 0.0
Net Profit 2,280.1 1,440.1 2,904.6 3,056.2
Core Net Profit 2,255.2 2,404.1 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. 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
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may from time to time have an interest in the securities mentioned by this report.

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The recommendation framework for stocks and sectors are as follows : -

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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.

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securities, subject to the duties of confidentiality, will be made available upon request.

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actions of third parties in this respect.

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