Published August 22, 2008

Wariness paying off for Sime Darby as it fends off unpromising projects

By S JAYASANKARAN
IN KUALA LUMPUR
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A NEW caution on Sime Darby's part could be the saviour of its share price going forward.

The new caution could even extend to the Northern Corridor, motivated more by politics.

Once the darling of the stock exchange, Malaysian multinational Sime Darby is a shadow of its former self, trading at almost half the market capitalisation it enjoyed when it re-listed late last year as the world's largest oil palm company.

At RM6.30 a share currently, Sime is now valued at RM37.2 billion (S$15.8 billion) compared with nearly RM66 billion when it re-listed last November.

The main reason for the share price decline is the steep drop in world crude palm oil prices, which fell from RM3,500 a tonne six months ago to around RN2,600 a tonne currently.

Plantations make up almost 70 per cent of Sime's earnings but, even so, its stock appears more bruised than other plantations like KLK and IOI Corporation.

It isn't entirely clear why this is so. For the year to end-June 2007, Sime made a RM2 billion net profit on the back of RM28 billion in revenues. And analysts expect a net profit of RM3.5 billion this year.



The former Synergy Drive came into being after it acquired eight companies, including Guthrie and Golden Hope early last year and went on to become Malaysia's largest company by way of market capitalisation when it re-listed.

Some investor worries may have surfaced four months ago when Sime reported RM120 million in futures trading losses at a Sime unit. Subsequently, two senior officials were sacked and three senior officials resigned.

But most of the worries centre on Sime's strong balance sheet and the possibility that the government could look to it as a vehicle for 'national service' projects.

Example: Sime drew up the blueprint for Prime Minister Abdullah Ahmad Badawi's grandiose scheme for the Northern Corridor Economic Region encompassing the states of Northern Perak, Kedah, Perlis and Penang. Indeed, Sime was supposed to have spearheaded large-scale rice cultivation in the region.

But a new caution seems to have descended on the company which, in itself, could be the best thing for it. In late June, for example, Sime announced that it would not take a 60 per cent interest in Sarawak Hidro, the owner of the 2,400 MW hydro-electric dam in Bakun, Sarawak.

Neither would it take part in building and owning two 700km cables that would transmit Bakun's power to Peninsular Malaysia.

Sime, which is currently building the dam, said in a terse statement that the project's economies 'did not fit its business model'.

Most analysts cheered the decision because many had felt that the RM9 billion undersea cable project, especially, was not viable.

The new caution could even extend to the Northern Corridor except that it may be motivated more by political considerations.

Except for Perlis, the other states all fell to the Opposition in the last election and Mr Abdullah may be loath to extend development to Opposition-led states of Kedah, Perak and Penang.

From those perspectives, Sime would seem to be singularly undervalued given its current levels. The company is trading at around 10 times 2008 earnings while the historical price-earnings mean over the last 10 years for plantations has been around 15 times.

Moreover, JPMorgan estimates that the continued integration of the three plantation groups could result in merger synergies that could contribute as much as 6-10 per cent towards net profit in 2009 and 2010.

Notwithstanding palm oil prices, Sime still casts a long shadow. With 525,000 hectares of oil palm estate, Sime is the world's largest listed plantation company.

It is also Malaysia's largest listed property landowner with some 3,520 ha of land available for immediate development.

Indeed, Sime's flotation added a very liquid heavyweight to a Malaysian exchange that has sorely lacked one.

It also added heft to the exchange in terms of Sime's global reach - a presence in 20 countries including Singapore - and brand-name as foreign fund managers generally would hold the world's largest plantation company in their portfolios.

Businessman Chua Ma Yu, who came up with the merger idea through a paper to then premier Mahathir Mohamad in 2002, once told BT that he expected Sime to become Malaysia's first RM100 billion company going forward. It may take longer than he thinks.