Sime Darby, MMHE: Completion of the SDE yard acquisition

Stock Name: SIME
Company Name: SIME DARBY BHD

Research House: ECMLIBRA

Price Call: HOLD

Target Price: 9.82

Sime Darby Bhd (SIME MK, Hold, TP: RM9.82) announced that Sime Darby Engineering Sdn Bhd (SDE) had on 30 Mar 2012 entered into a supplemental agreement with Malaysia Marine and Heavy Engineering Bhd (MMHE MK, Sell, TP: RM4.21) to amend certain terms of the sale and purchase agreement (SPA) of the said yard. This includes the novation to MMHE of SDE's rights, title, interest, liabilities, obligations and responsibilities under the agreement dated 20 Sep 2011 entered between SDE and Kebabangan Petroleum Operating Company Sdn Bhd for the Kebabangan Northern Hub Development offshore Sabah project, encompassing integrated topsides with load out support frame. The proposed disposals of its yard were completed on 31 Mar 2012 with the final disposal consideration determined at RM296m (for Petronas acquisition) and RM393.4m (for MMHE acquisition), respectively. (Bursa Announcement)

Comments: The novation of the Kebabangan Project (KBB Project) to MMHE marks Sime Darby's exit from the oil & gas scene, as the company realigns its focus to segments where Sime can achieve a position of leadership (i.e. plantations and automotive). The KBB Project was awarded in April 2011 for a contract sum of RM1.15bn and a period of 29 months. We have already accounted for the disposal of the fabrication yards. We make no changes to our earnings estimates, and we maintain our recommendation and target price. (Aris Sharif)

Currently the SDE yard is fully-occupied with 2 projects: (i) KBB, and (ii) 2 ONGC topsides. For the ONGC project, MMHE will lease the yard to SDE to finish the job (no figures were released). The KBB project is to construct a 18,000MT gas production topside for the Kebabangan clusters operated by Shell. The project is 15% completed prior to the novation to MMHE and to be load out in 1Q2014. Based on this figure, the project will push MMHE's orderbook to RM4.1bn (additional RM978m) which will last until 2014. We assume that the project will bring in RM360m, RM490m and RM128m in FY12-FY14 respectively, which could rake in RM40m, RM54m and RM14m in EBITDA. We make no changes to our estimates, as we have imputed higher job replenishments during the same period, and also because the new yard cannot accommodate more jobs until early-2014. Maintain SELL with TP: RM4.21. (Azree Azhar) 

Source: ECM Newz Bits 04 April 2012