May 5, 2010

SIME DARBY Bakun: Review by HWDBS

Sime Darby (RM8.76; Hold; Price Target: RM9.40; SIME)

A RM1b write off (i.e. 17 sen) would be serious and may prompt us to downgrade the valuation of the energy and utilities segment (PE target of 13x currently)

Cost overrun in Bakun Project?
The Star today reported that Sime Darby may incur cost overruns as high as RM1.7b from carrying out the civil works for the Bakun hydro-electric project. Sime Engineering, a unit of Sime Darby, was awarded the civil works for the Bakun project in September 2002 at a fixed lump-sum price of RM1.8b (it had been reported that Sarawak Hidro Sdn Bhd has approved a variation order for RM700m for the Bakun project). The article also implied that the Government may have agreed to reimburse Sime Darby for around RM700m, leaving Sime Darby with around RM1b to be dealt with. 

The finding of the more than RM1b cost overrun in the Bakun project is believed to be among the findings of the special taskforce within the group that was set up late last year to probe losses in its energy and utilities division. The taskforce is also looking into the reasons for the cost overruns and whether there were lapses in internal audit and whether other improprieties occurred. A change in leadership at its energy and utilities division had taken place recently, following the resignation of Datuk Mohamad Shukri Baharom Mohamad Shukri who was replaced by Hisham Hamdan, previously the executive vice-president for group strategy and business development. Sime Darby has also said it has been taking steps to prevent a repeat of cost overruns, including reviewing and re-evaluating systems and processes in the division.

Our net profit projection for FY10F is RM2,688.1m. Hence, a RM1b write off (i.e. 17 sen) would be serious and may prompt us to downgrade the valuation of the energy and utilities segment (PE target of 13x currently). This may not significantly alter our valuation for the Group, however, as forecast FY11F energy and utilities EBIT of RM225m would only account for 5% of the Group's total. There is no confirmation from the Group at this point and we will update once more details are available.