Stock Name: SIME
Company Name: SIME DARBY BHD
Research House: CIMB
Sime Darby Bhd
(May 6, RM8.58)
Downgrade to neutral at RM8.63, with target price of RM9.70: We had a trading buy call on Sime Darby because we believe in the group's plan to unlock value by improving fresh-fruit-bunches yields at its oil palm estates and becoming more aggressive in realising the value of its strategic landbank in Malaysia.
We have seen some evidence of improvement in these two areas. But these positives are likely to be overshadowed by the Bakun issues and uninspiring earnings outlook, at least in the short term.
Sime's 1.3% share price loss yesterday wiped RM781 million from its market cap which is more than the likely losses. But more importantly, this issue raises questions about transparency, execution and earnings momentum and leads us to believe there are insufficient catalysts for the stock to outperform in the short term.
To account for the risk of write-downs and our dented confidence in Sime Darby, we are now applying a 10% discount to our sum-of-parts value, which reduces our target price from RM10.82 to RM9.70. Although the stock's P/E valuation may be more attractive than its peers, it is offset by earnings downside risks.
According to the press, Sime Darby has incurred more than RM1 billion in cost overruns from carrying out a civil work contract for the Bakun hydroelectric project. One estimate puts the total cost overruns at RM1.7 billion, which is almost the same size as Sime Darby's actual Bakun contract of RM1.8 billion.
The cost overrun discovery is believed to be among the findings of the special taskforce that the group set up late last year to probe into losses in its energy and utilities division.
Sources said specialists from external accounting, legal and engineering firms were assisting the taskforce. It was reported that the government has agreed to reimburse around RM700 million to Sime Darby, leaving the group with around RM1 billion to deal with.
When contacted by reporters, Sime Darby did not deny or confirm this. To recap, Sime Engineering, a unit of Sime Darby, was awarded the civil works for the Bakun project in September 2002 for a fixed lump sum price of RM1.8 billion. - CIMB Research, May 6
This article appeared in The Edge Financial Daily, May 7, 2010.
Company Name: SIME DARBY BHD
Research House: CIMB
Sime Darby Bhd
(May 6, RM8.58)
Downgrade to neutral at RM8.63, with target price of RM9.70: We had a trading buy call on Sime Darby because we believe in the group's plan to unlock value by improving fresh-fruit-bunches yields at its oil palm estates and becoming more aggressive in realising the value of its strategic landbank in Malaysia.
We have seen some evidence of improvement in these two areas. But these positives are likely to be overshadowed by the Bakun issues and uninspiring earnings outlook, at least in the short term.
Sime's 1.3% share price loss yesterday wiped RM781 million from its market cap which is more than the likely losses. But more importantly, this issue raises questions about transparency, execution and earnings momentum and leads us to believe there are insufficient catalysts for the stock to outperform in the short term.
To account for the risk of write-downs and our dented confidence in Sime Darby, we are now applying a 10% discount to our sum-of-parts value, which reduces our target price from RM10.82 to RM9.70. Although the stock's P/E valuation may be more attractive than its peers, it is offset by earnings downside risks.
According to the press, Sime Darby has incurred more than RM1 billion in cost overruns from carrying out a civil work contract for the Bakun hydroelectric project. One estimate puts the total cost overruns at RM1.7 billion, which is almost the same size as Sime Darby's actual Bakun contract of RM1.8 billion.
The cost overrun discovery is believed to be among the findings of the special taskforce that the group set up late last year to probe into losses in its energy and utilities division.
Sources said specialists from external accounting, legal and engineering firms were assisting the taskforce. It was reported that the government has agreed to reimburse around RM700 million to Sime Darby, leaving the group with around RM1 billion to deal with.
When contacted by reporters, Sime Darby did not deny or confirm this. To recap, Sime Engineering, a unit of Sime Darby, was awarded the civil works for the Bakun project in September 2002 for a fixed lump sum price of RM1.8 billion. - CIMB Research, May 6
This article appeared in The Edge Financial Daily, May 7, 2010.
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