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

Sime Darby Bhd
(July 29, RM7.69)
Maintain neutral at RM7.76 with lower target price of RM8.15 (from RM8.40): Among the key takeaways from our recent visits are that the final results of the forensic audits on the energy and utilities (E&U) losses will be known at end-August.

We gather that the losses are due to poor management of the projects. The group was unable to secure contractors in a timely manner, for example.

It faced cost overruns and was poor in its control of claims management. The losses were revealed and provided for in mid-May 2010 after the Board Work Group reported their findings to the board of directors.

We gather that the group has completed and delivered the Qatar Petroleum and Marine projects. As such, we believe the risk of further provisions for these two projects is low. The Maersk Oil Qatar project, however, is only 96% complete and the final handover is targeted for September.

Another project pending completion is the Bakun project, which is also 96% complete. We believe there is a risk of further provisioning for these two projects before the final handover.

We are more concerned about Bakun as the consortium members may not be willing to fork out their share of the disputed losses and there are still no details on the breakdown of the Bakun cost overruns.

In FY2010 ended June 30, fresh-fruit-bunch (FFB) production fell 0.2% year-on-year, which is below our forecast.

We are cutting our FY2010 to FY2012 earnings forecasts by 2% to 6% to account for lower-than-expected FFB yields due to poor weather.

Also, the contracts for top management will be up for renewal in November and Sime Darby will be holding its AGM then.

News reports have touched on the possibility that some of the top management may leave when their contracts expire. We would not be surprised by a management reshuffle in November, after which the dust may finally start to settle for the group.

This has the effect of lowering our sum-of-parts (SOP)-based target price from RM8.40 to RM8.15. We remain neutral on the stock as our positive take on the appointment of a new CEO is offset by the ongoing probe into the E&U unit and the possibility of a management reshuffle and changes to the group's strategy.

Sime Darby appointed Datuk Mohd Bakke Salleh as acting president and group chief executive on July 15, replacing Datuk Seri Ahmad Zubir Murshid. The appointment of Mohd Bakke, former president/CEO of Felda Global Ventures Holdings Sdn Bhd, came close to a month after Sime announced that he had been picked as the new CEO.

According to news reports, Bakke's first task is to implement a new group-wide organisation and reporting structure, which is the second phase of the ongoing review of gaps in the management, organisation and reporting structure at the energy and utilities division.

He will also be working on the group's future strategy. ' CIMB Research, July 29


This article appeared in The Edge Financial Daily, July 30, 2010.