Sime Darby Bhd (Kenanga Research) sell; target price RM7.90

Sime Darby
Disappointing

• Forgettable set of interims as the group slips into the red due to the troubled Energy and Utilities division. Plantation was in line with our expectation with 9M10 EBIT coming in at 72% of our forecast. Industrial came in below our expectation on lower demand and adverse currency movement but property and motor were higher than our forecast. Property was boosted by healthy take up and favourable product mix while motor was shored up by China / HK.

• QoQ, plantation down 32% despite 10% improvement in CPO price to RM2,425 (2Q10 : RM2,199) on 28% lower FFB production, hit by the dry spell across Malaysia and Indonesia. Property up 63% at the EBIT on higher sales and better product mix Industrial EBIT declined 15% on lower demand in Singapore and Australia but was mitigated by higher s pare part sales in Australia and a gain on disposal of a property in Malaysia of RM19m. The RM964m provisioning for the four troubled project – Qatar Petroleum, Maersk Oil Qatar, Marine and Bakun took the wind out of the division, leading to RM910m EBIT losses.

•  Briefing was centred mainly on the group’s risk management or the lack of it and the possibility of further provisioning. On both counts, we suspect that the audience could have been disappointed with the lack of clarity from the management especially with regards to whether there will be additional dents to the bottomlline. Provisioning thus far has been computed conservatively based on a technical committee’s input. Resolution will only be after completion and handover of the respective projects. Without assurance that the provisioning is final, share price performance will most likely to languish.

• No time line guided as to the completion of the “high level review” being currently conducted by the Board Work Group led by Datuk Seri Panglima Andrew Sheng. As for speculation on possible mismanagement on other divisions as well, management brushed it off and reassure that it is unlikely that any further nasty surprises will be unearthed. As for possible break up of the conglomerate, management sees no such possibility.

• Changes have been swift and sweeping across the group starting with the communication between Board and Senior Management. Since the debacle, instead of the Group CEO briefing the Board on a solo basis, a committee comprising the Group CEO, COO and CFO will instead undertake the assignment of communicating with the Board.

• Lowering our forecast further as we had underprovided for the losses at the E&U division believing that the RM200m Qatar Petroleum Project could have been a prior year adjustment to be effected through the FY09 accounts. Tweaking our motor and property numbers, our net FY10F is lowered by 8.4% while FY11 is marginally higher by 0.1%. Without the reassurance that no more provisioning will be needed, share price performance is most likely to continue underperform in the near term. Sell maintained with unchanged TP of RM7.90 based on 16x FY11F.