PP 7767/09/2010(025354)

RHB Research

Malaysia Corporate Highlights Institute Sdn Bhd

A member of the
RHB Banking Group
Company No: 233327 -M

V is it Note
5 May 2010
MARKET DATELINE

Sime Darby Share Price

Fair Value
:
:
RM8.76
RM9.70
Cost Overrun at Bakun? Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (SIME; Code: 4197) Bloomberg: SIME MK

Net Core EPS Cons. Net
FYE Turnover profit EPS gth PER EPS* P/NTA P/CF* ROE Gearing GDY
Jun (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)
2009 31,013.9 2,255.2 37.5 (38.1) 23.3 - 2.6 17.1 10.6 10.7 2.5
2010f 31,855.9 2,377.5 39.6 5.4 22.1 45.0 2.6 15.6 10.9 17.2 2.5
2011f 35,294.9 2,904.6 48.3 22.2 18.1 54.0 2.5 13.1 12.6 20.1 3.3
2012f 39,784.0 3,056.2 50.9 5.2 17.2 59.0 2.4 12.4 12.7 24.1 3.9
Main Market Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ Cost overrun at Bakun? According to a media report, Sime Darby Issued Capital (m shares) 6,009.4
has incurred more than RM1bn in total cost overruns from carrying out Market Cap (RMm) 52,642.3
the RM1.8bn civil works contract for the Bakun hydro-electric project, Daily Trading Vol (m shs) 11.7
with one estimate putting the overrun figure in the region of RM1.7bn. 52wk Price Range (RM) 6.25-9.24
The discovery of the cost overrun is believed to be among the findings Major Shareholders: (%)
Skim Amanah Saham
of the special taskforce within the group that was set up late last year Bumiputra 30.9
to probe losses in its energy and utilities division. Permodalan Nasional Bhd 17.0
Employees Provident Fund 11.7
♦ Management admits to cost overrun, but not sure of amount.
We note that Sime obtained this contract back in 2002 and according FYE June FY10 FY11 FY12
EPS chg (%) - - -
to management during our last meeting, the civil works part of the
Var to Cons (%) (12.1) (10.5) (13.8)
project is almost completed and management was not entirely sure
how much the cost overrun was going to be at that point. PE Band Chart

♦ Additional RM170m cost overrun would affect earnings by 5-

PER
PER
=
=
22x
19x
PER = 16x
7%. We note that Sime has already made some RM130m in provisions PER = 13x
for its share of the cost overrun for this project while it is understood
that the Government has also agreed to reimburse Sime for around
RM700m. If this is the case, this would mean Sime would only have to
provide another RM170m for the cost overrun, assuming it is at
RM1bn. A provision of RM170m would negatively affect Sime’s
bottomline by approximately 5-7%. Relative Performance To FBM KLCI

♦ Forecasts unchanged for the moment until we get further

clarification from management. We believe there is a likelihood also
Sime Darby
that the Government would reimburse Sime for any additional cost
overruns, should it be proven that the cost overruns were caused by
FBM KLCI
higher material or construction costs, rather than cost
mismanagement.

♦ Risks: (1) a reversal in crude oil price trend resulting in reversal of

CPO and other vegetable oils price trend; (2) weather abnormalities;
(3) change in emphasis on implementing global biofuel mandates; and
(4) a slower-than-expected global economic recovery.

♦ Investment case. No change to our SOP-based fair value for Sime of Hoe Lee Leng
RM9.70. Maintain Outperform recommendation for Sime given its (603) 92802184
further potential upside from GLC reforms, additional merger synergies hoe.lee.leng@rhb.com.my
and yield improvements from its Indonesian plantations.

Please read important disclosures at the end of this report.

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 5 May 2010

Table 2. Sum-Of-Parts Breakdown

Division Valuation method Value (RMm)
Plantations CY10 PE 18x 43,216.9
Property CY10 PE 14x 5,310.3
Motor CY10 PE 14x 3,168.5
Heavy Equipment CY10 PE 14x 11,210.8
Energy & Utilities CY10 PE 16x 3,841.6
Others CY10 PE 14x 272.0
Net Cash / (Debt) End 2QFY10 (2,098.0)
TOTAL 64,922.1

No. issued shares 6,009.4

SOP/share (RM) 10.80

Less: Holding co discount 10% (1.08)

Fair Value/share (RM) 9.72

Source: RHBRI

Table 3. Earnings Forecasts Table 4. Forecast Assumptions

FYE Jun (RMm) FY09a FY10F FY11F FY12F FYE Jun FY10 FY11F FY12F

Turnover 31,013.9 31,855.9 35,294.9 39,784.0 CPO Price (RM/tonne) 2,450 2,600 2,500
Turnover growth (%) (8.9) 2.7 10.8 12.7 FFB Production Gth (%) 0.5 2.5 1.6

Operating Costs (28,901.9) (29,435.7) (32,218.7) (36,597.1) Heavy Equipmt Op Profit Gth (14.2) 19.6 15.8
(%)
Operating Profit 3,126.1 3,461.9 4,230.2 4,487.7 Energy & Utilities Op Profit 314.0 13.6 8.6
Gth (%)
Property Op Profit Gth (%) 16.4 26.1 18.4
EBITDA 3,944.3 4,459.4 5,333.4 5,690.9 Motor Op Profit Gth (%) 24.0 5.0 5.0
EBITDA margin (%) 18.3 19.3 20.3 21.3

Depreciation (818.2) (997.5) (1,103.1) (1,203.2)

Net Interest (93.9) (169.3) (243.6) (297.3)
Associates 14.5 100.0 90.0 99.0
Exceptionals 24.9 0.0 0.0 0.0

Pretax Profit 3,071.6 3,392.6 4,076.7 4,289.5

Tax (730.8) (916.0) (1,019.2) (1,072.4)
PAT 2,340.8 2,476.6 3,057.5 3,217.1
Minorities (60.7) (99.1) (152.9) (160.9)
Discontinued ops 0.0 0.0 0.0 0.0
Net Profit 2,280.1 2,377.5 2,904.6 3,056.2
Core Net Profit 2,255.2 2,377.5 2,904.6 3,056.2

Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
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be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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securities, subject to the duties of confidentiality, will be made available upon request.

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actions of third parties in this respect.

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