May 6, 2010

SIME - Affin maintains add call on Sime Darby

Stock Name: SIME
Company Name: SIME DARBY BHD
Research House: AFFIN

Sime Darby Bhd
(May 5, RM8.63)
Maintain add at RM8.76 with target price of RM8.70
: A local daily reported that Sime Darby has incurred total cost overrun amounting to RM1.7 billion for the Bakun project, of which the government has agreed to reimburse around only RM700 million. That would leave Sime with an estimated loss of RM1 billion for the RM1.8 billion contract secured in 2002.

The report added that the massive cost overrun was discovered by a special taskforce set up late last year to investigate losses at its energy and utilities division.

In 2HFY09, Sime's energy and utilities division reported an operating loss of RM110 million due to a loss of RM201 million recorded by its oil and gas unit following cost overruns from the RM2.1 billion Maersk Oil Qatar (MOQ) project.

Civil works for the Bakun project amounting to RM1.8 billion were awarded to the Malaysia-China Hydro JV consortium in 2002. The consortium was led by Sime Engineering and Sino-Hydro Corporation of China. Other members of the consortium were WCT, MTD Cap, Ahmad Zaki Resources, Syarikat Ismail, and Edward & Sons.

According to the report, Sime said that a total of RM130 million has been provided for its share of the cost overrun in the project. If the reported total cost overrun is true, additional provisions of around RM870 million would have to be made in FY10 or later. This amount is a 20.5% of our FY10 pretax profit forecast.

Even though one-off, the amount is massive and coming straight after the MOQ losses, would not reflect well on the company's project execution capability as well as transparency.

Pending the management's response on the report, the target price of RM8.70 (based on CY10 price earnings of 18 times) and add rating (in anticipation of valuation on CY11 earnings per share) are maintained. - Affin Research, May 5


This article appeared in The Edge Financial Daily, May 6, 2010.

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