KDN: PP 10744/04/2010

14 May 2010

Corporate Update

Sime Darby Berhad Maintain NEUTRAL

Skeletons emerge from the Energy & Utilities’ closet Target Price (TP): RM8.70

• Sime Darby established a Board Work Group STOCK INFO

(BWG) in October 2009 to review the operations Price ( 13 May 2010) RM8.65 KLCI 1,346.92
of its Energy & Utilities Division (E&U). 4197/SIME
Issued shares (mil) 6,009.5 Bursa / Bloomberg
MK
• The BWG reviewed the following E&U projects:
Main/
(1) QP project, (2) MOQ project, (3) Marine Par Value (RM) 0.50 Board / Sector
Trading
project, and (4) Bakun project; and based on its
Market cap. (RM’m) 51,981.9 Syariah Compliant Yes
findings have decided to recognize provisions
totaling RM964 million on Sime Darby’s results Price over NTA 2.45
for 2HFY10. RM6.45–
52-wk price Range Major Shareholders
RM9.24
• More importantly, the BWG made several key Sekim Amanah
personnel changes to correct deficiencies with Beta (against KLCI) 0.98 Saham 36.31%
regard to management and internal controls. Bumiputra
3-mth Avg Daily Vol 5.52m PNB 15.52%
• Pursuant to the aggressive ‘kitchen-sinking’
exercise we see no necessities to adjust our 3-mth Avg Daily Value RM45.9m EPF 14.12%
FY11 earnings forecast as we are sanguine that
all ‘skeletons’ will be out of the E&U’s closet by the end of FY10. Due to, (1) the non-recurring nature of
the losses, and (2) we see no material impact from the announcement on our FY11 earnings forecast, we
thereby maintain our Neutral recommendation on the stock with a target price of RM8.70 based on FY11
PER of 19.3x.

The establishment and terms of reference of BWG. Sime Darby established the BWG in October 2009 to review
the operations of its E&U business following its results in FY2009. The BWG consists of Datuk Seri Panglima Andrew
Sheng Len Tao, Tan Sri Wan Mohd Zahid Mohd Noordin and Datin Paduka Zaitoon Dato’ Othman. The BWG
reviewed the following projects: (1) the Bulhanine and Maydan Mahzam project with Qatar Petroleum (QP project), (2)
the Maersk Oil Qatar project (MOQ project), (3) the construction of vessels for use in the MOQ Project (Marine
project), and (4) the Bakun hydroelectric dam project (Bakun project).
Additional provisions of RM964 million in FY2010. As a result of the review conducted by BWG, there will be
provisions totaling RM964 million on Sime Darby’s results for 2HFY10. However further announcements will be made
after negotiations are concluded with the client in each project. Summary of the key findings of BWG:
1. The QP Project. It was awarded in April 2006 and was scheduled for completion in August 2008. The QP
project encountered delays and cost overruns which resulted in losses exceeding RM500 million, which have
already been accounted for. E&U is currently in negotiations with the client on claims for the cost overrun.
However, in light of the delay in concluding this matter, BWG has decided to reverse the revenue of RM200
FYE 30 Jun FY08 FY09 FY10E FY11F
Revenue (RM’m) 34,044.7 30,166.2 32,036.2 33,914.2
EBIT (RM’m) 5,213.8 2,919.0 3,523.9 4,069.4
Pretax Profit (RM’m) 5,206.4 2,855.4 3,473.6 4,034.0
Net Profit (RM’m) 3,512.1 1,884.6 1,563.3 2,702.8
EPS (sen) 59.6 31.4 26.0 45.0
EPS (%) 35.0% -47.4% -17.0% 72.8%
PER (x) 14.5 27.6 33.2 19.2
N Div (sen) 34.5 19.0 23.0 27.0
N Div (%) 4.0% 2.2% 2.7% 3.1%
Source: Company, Forecasts by MIDFR

KINDLY REFER TO THE LAST PAGE OF THIS PUBLICATION FOR IMPORTANT DISCLOSURES
 MIDF EQUITY BEAT
Friday, 14 May 2010

million previously recognized in the accounts for FY2009.

2. The MOQ Project. It was awarded in January 2007 and was due for completion in October 2009. There have
been delays and cost overruns in this project which have resulted in foreseeable losses of RM526 million, of
which RM367 million has already been recognized. Negotiations are currently underway with the client but BWG
has decided to recognize the remaining RM159 million losses.
3. The Marine Project. It concerns the construction of two tug boats and a barge for use in the MOQ project. The
barge has not yet been delivered and BWG estimates that the project may result in losses of about RM155
million.
4. The Bakun Project. Sime Engineering Sdn Bhd holds a 35.7% effective interest in the project. It was awarded
in September 2002 and was initially scheduled for completion in September 2007. However, completion has
been delayed and costs have escalated. There could be a potential additional cost of RM450 million attributable
to Sime Darby. Negotiations are in progress with the client and subcontractors on the project.
Personnel changes to correct deficiencies with regard to management and internal controls. The BWG has
considered the implications of the above with regard to the management and internal controls of Sime Darby and is
taking immediate and stringent measures to correct the deficiencies identified. The President & Group Chief Executive
(GCE) of Sime Darby, Dato’ Seri Ahmad Zubir Murshid, has been asked to take leave of absence prior to the expiry of
his contract in November 2010. The Nomination Committee has been tasked to search for a new GCE. Pending the
appointment of a new GCE, Dato’ Azhar Abdul Hamid (currently Executive Vice President, Plantation Division) has
been appointed Acting GCE. He will work closely with the Group Chief Operating Officer, Dato’ Abd Wahab Maskan
and also with the Group Chief Financial Officer, Madam Tong Poh Keow. Mr Franki Anthony Dass (currently Head,
Plantation Upstream) has been appointed Acting Executive Vice President, Plantation Division. In making these new
appointments, the BWG has given instructions to the management to strengthen controls and manage all operations
in the most prudent and efficient manner.
Our worries over more provisions were not unfounded. In our Equity Beat titled "Sime Darby: More skeleton in the
Energy & Utilities’ closet?" dated 1 March 2010, we stated our worries over further provisions related to the E&U
business hence our FY10 net earnings forecast of RM2.33 billion which was lower than Sime Darby's KPI target and
the then market consensus of RM2.50 billion and RM2.85 billion respectively. Our FY10 figure was inclusive of
projected RM400 million in total provisions thus we were expecting a further RM200 million charges in 2HFY10.
However, in light of the above announcement, we clearly underestimated the magnitude of the situation. Hence we
revise downward our FY10 earnings forecast by 33% to RM1.56 billion. On a positive note, this aggressive ‘kitchen-
sinking’ exercise shall provide Sime Darby in general and its E&U business in particular with a fresh beginning. We
see no necessities to adjust our FY11 earnings forecast as we are sanguine that all ‘skeletons’ will be out of the E&U’s
closet by the end of FY10.
We maintain our Neutral recommendation with a target price of RM8.70. We applaud Sime Darby’s management
decision to take the bull by the horns and did a thorough cleaning of its E&U’s books. Pursuant to the book cleaning
exercise we would not be surprised if Sime Darby were to announce some amount of write-backs later on particularly
from the Bakun project. In addition, a saving grace to the whole episode is that Sime Darby was hit at its periphery
E&U business and not at its core plantation division. The prospects for its mainstay plantation business is still positive
as the secular outlook relating to CPO prices remain favorable coupled with the yields improvement of its Indonesian
estates. Furthermore, the ongoing economic recovery is providing the growth momentum for its property, motors and
healthcare businesses as attested by their improved performances in 1HFY10. It is also worth noting that the RM964
million losses is equivalent to only 1.9% of Sime Darby’s market capitalization of about RM52 billion. However we do
expect a downward knee-jerk reaction on Sime Darby share price in relation to this announcement. Nevertheless due
to, (1) the non-recurring nature of the losses, and (2) we see no material impact from the announcement on our FY11
earnings forecast, we thereby maintain our Neutral recommendation on the stock with a target price of RM8.70 based
on FY11 PER of 19.3x.

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 MIDF EQUITY BEAT
Friday, 14 May 2010

DAILY PRICE CHART

Syed Muhammed Kifni

smkifni@midf.com.my
03-2173 8383

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 MIDF EQUITY BEAT
Friday, 14 May 2010

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MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS

STOCK RECOMMENDATIONS

BUY Total return is expected to be >15% over the next 12 months.

Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been
TRADING BUY
assigned due to positive newsflow.

NEUTRAL Total return is expected to be between -15% and +15% over the next 12 months.

SELL Total return is expected to be <15% over the next 12 months.

Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has been
TRADING SELL
assigned due to negative newsflow.

SECTOR RECOMMENDATIONS

POSITIVE The sector is expected to outperform the overall market over the next 12 months.

NEUTRAL The sector is to perform in line with the overall market over the next 12 months.

NEGATIVE The sector is expected to underperform the overall market over the next 12 months.