RHB Top Story : Sime Darby – Is the worst over? Not yet, in our view Underperform

Top Story : Sime Darby – Is the worst over? Not yet, in our view Underperform

Visit Note

- In the first few weeks of his appointment, Sime Darby’s new CEO, Dato’ Mohd Bakke Salleh, has visited all the divisions, met with all the Heads of Departments, reviewed the Group’s long term 4-year plan and set out a strategic plan for all the divisions. On 24 Aug, the Board will meet to review the plan and the results of the forensic audit for the oil & gas division, after which the results for 4QFY10 will be released on 26 Aug. Any further provision required for the two uncompleted projects, (ie. MOQ and Bakun, which are 96% complete), would be done in the 4QFY10 results.

- Going forward, management is hopeful of turning around the oil and gas division within the next 1-2 years, and is trying to ensure a stable pipeline of projects to strengthen its orderbook. While we are encouraged to note that Sime’s oil & gas orderbook is now at RM2bn, we note that the bids for these projects were put in under the previous management. Although management has targeted gross margins for these projects to be around 10%, we are skeptical of this target, as we are wary that the previous management may have potentially underpriced its project costs in order to win the contract. Should Sime not complete these projects within budget, there could be a risk of more provisions in the future.

- Post-earnings revision, we lower our SOP-based fair value to RM8.00 (from RM8.15) and maintain our Underperform recommendation.