March 24, 2011

SIME - Sime Darby: Writeback of RM100m for MOQ project

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

Sime Darby Bhd
(March 24, RM9.15)
Maintain outperform at RM9.15 with fair value of RM10.60
: Sime Darby has signed a close-out agreement on March 17 for the completion of its Maersk Oil Qatar (MOQ) project which stipulates that: (i) In full and final settlement of all claims (including back charges and other claims), Sime paid a net close-out sum of US$41.9 million (RM127 million) to MOQ on March 21; (ii) Sime will be relieved of all remaining works under the contract save for providing outstanding final documentation and warranty obligations, the warranty period will be reduced to 18 months (from 24 months); and (iii) the performance bond amount for the warranty period is reduced to 2.5% of the contract price (US$16 million), from 10% (US$63 million) previously.

Despite having to pay the net close-out sum of US$41.9 million, the terms of this agreement will result in a positive profit and loss impact for Sime of RM100 million. This is in view of the fact that Sime had already provided a total of RM300 million for this project, RM159 million of which was in 3QFY10.

Assuming this is a taxable gain, we estimate the writeback will have a +2.4% impact on our FY11 forecasts. We expect the writeback to be done in 3QFY11ending June.

Risks include: (i) a convincing reversal in crude oil price trend resulting in reversal of crude palm oil and other vegetable oil price trends; (ii) weather abnormalities resulting in an over- or under-supply of vegetable oils; (iii) increased emphasis on implementing global biofuel mandates and trans-fat policies; and (iv) a slower than expected global economic recovery, resulting in lower than expected demand for vegetable oils.

As we consider this to be an exceptional item, we have not made any changes to our core net profit forecasts for Sime.

We maintain our 'outperform' recommendation with RM10.60 fair value. ' RHB Research, March 24


This article appeared in The Edge Financial Daily, March 25, 2011.

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