Stock Name: SIME
Company Name: SIME DARBY BHD
Research House: OSK
Sime Darby Bhd
(May 31, RM7.75)
Maintain sell at RM7.83 with reduced target price of RM6.74 (from RM7.02): Sime Darby's 9MFY10 results were disappointing, even if we removed the effects of provisioning for its oil & gas (O&G) and engineering division amounting to RM1.33 billion year-to-date (YTD) and RM964 million for 3Q alone.
The plantation segment did better in the 9M, registering a 36.4% increase in earnings before interest and tax (Ebit). The improvement came from both upstream (RM1.56 billion against RM1.29 billion last year) and downstream, which turned around with a RM141,000 operating profit. Its Indonesian operation's fresh fruit bunches (FFB) production rose 23.3%, with group OER improving from 21.4% to 22%, driving the segment's profitability.
Despite the improvement, the segment profits so far suggest that our earlier estimates of RM2.64 billion were too high. Hence, we are cutting it by 8.6% to RM2.41 billion. FY11 and FY12 segment profit forecasts are also cut by similar percentage.
Provisions for Bakun are for estimated cost to completion. While some cost escalation has been provided for, there could still be more although we doubt it would be as significant as what was already provided for. So far, these provisions are non-cash items but will become cash items subsequently.
Segment Ebit declined by 14.8% on lower demand for new heavy equipment in Singapore and Australia. Stripping out the RM19 million gains from property disposal, Ebit fell by 17.8%. We are trimming contribution from Australia by between 9.7% and 13.2% for FY10'FY12 to reflect slower growth.
We have reduced our earnings forecast by 10.3% to 10.5% for FY10'FY12. We are rolling over our target price to 15 times CY11 earnings, which was based on our lower forecast, is cut from RM7.02 to RM6.74. While Sime's massive writedowns and its first-ever quarterly loss hog the limelight, these writedowns mask the weaker-than-expected results in other key divisions. Maintain sell on uncertainty over further writedowns and premium valuation against 'best of breed' companies. A lack of strategic focus and possibly loose internal controls, which we believe led to the sizeable losses, reinforce our belief that Sime's premium valuation is not justifiable. ' OSK Investment Research, May 31
This article appeared in The Edge Financial Daily, June 1, 2010.
Company Name: SIME DARBY BHD
Research House: OSK
Sime Darby Bhd
(May 31, RM7.75)
Maintain sell at RM7.83 with reduced target price of RM6.74 (from RM7.02): Sime Darby's 9MFY10 results were disappointing, even if we removed the effects of provisioning for its oil & gas (O&G) and engineering division amounting to RM1.33 billion year-to-date (YTD) and RM964 million for 3Q alone.
The plantation segment did better in the 9M, registering a 36.4% increase in earnings before interest and tax (Ebit). The improvement came from both upstream (RM1.56 billion against RM1.29 billion last year) and downstream, which turned around with a RM141,000 operating profit. Its Indonesian operation's fresh fruit bunches (FFB) production rose 23.3%, with group OER improving from 21.4% to 22%, driving the segment's profitability.
Despite the improvement, the segment profits so far suggest that our earlier estimates of RM2.64 billion were too high. Hence, we are cutting it by 8.6% to RM2.41 billion. FY11 and FY12 segment profit forecasts are also cut by similar percentage.
Provisions for Bakun are for estimated cost to completion. While some cost escalation has been provided for, there could still be more although we doubt it would be as significant as what was already provided for. So far, these provisions are non-cash items but will become cash items subsequently.
Segment Ebit declined by 14.8% on lower demand for new heavy equipment in Singapore and Australia. Stripping out the RM19 million gains from property disposal, Ebit fell by 17.8%. We are trimming contribution from Australia by between 9.7% and 13.2% for FY10'FY12 to reflect slower growth.
We have reduced our earnings forecast by 10.3% to 10.5% for FY10'FY12. We are rolling over our target price to 15 times CY11 earnings, which was based on our lower forecast, is cut from RM7.02 to RM6.74. While Sime's massive writedowns and its first-ever quarterly loss hog the limelight, these writedowns mask the weaker-than-expected results in other key divisions. Maintain sell on uncertainty over further writedowns and premium valuation against 'best of breed' companies. A lack of strategic focus and possibly loose internal controls, which we believe led to the sizeable losses, reinforce our belief that Sime's premium valuation is not justifiable. ' OSK Investment Research, May 31
This article appeared in The Edge Financial Daily, June 1, 2010.
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