Published August 14, 2009

Sime Darby in need of big overhaul

Najib has singled out conglomerate for reform, including listing plantation biz

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(KUALA LUMPUR) When is it a good time for a company to shape up? Maybe when the prime minister himself orders it.

Spreading itself thin? Shackled by an unwieldy gamut of businesses, the group risks losing its No 1 slot

Malaysian conglomerate Sime Darby needs a big overhaul, including possibly listing its prized plantations business and selling its underperforming motor unit, to boost valuations and compete better with fast-growing rivals.

Just as some investors clamour for Sime Darby to consider these options, Prime Minister Najib Razak has promised reforms of huge government-linked companies and singled out Sime Darby as the country aims to boost investments.

Singapore-listed Wilmar and Indonesian Astra Agro Lestari are emerging as the key beneficiaries of recovering palm oil prices driven by better growth potential and a greater focus on commodity businesses.

Shackled by an unwieldy gamut of businesses from property in China to selling BMW cars in Malaysia, Sime Darby risks losing its No 1 slot, unless it overhauls its sprawling empire to focus on boosting palm oil yields, a key determinant of profitability.

Plantations accounted for about 74 per cent of Sime Darby's 2008 profit with the rest coming from property, motor, heavy equipment and energy, according to company data.

'They are still a plantation company, however much they try to diversify,' said Choong Khuat Hock, research director at Kuala Lumpur-based fund manager KSC.

'If they don't focus enough on plantations, soon they will be overtaken.'

Majority-owned by the state asset manager and the employees provident fund, Sime Darby's business model bundles the cash-generating plantations operations with other less profitable divisions such as the motor unit.

Investors are already taking note. Wilmar's shares have surged 120 per cent and Indonesia's top planter, Astro Agro is up 86 per cent versus a 60 per cent rise in Sime Darby's stock. Wilmar is valued at US$27 billion, while Sime has a valuation of US$14 billion.

Earnings per share at Sime Darby, whose financial year ends in June, is expected to fall 44 per cent in fiscal 2009.

Wilmar's EPS is set to shrink 35 per cent in January-December 2009 and Astra Agro's EPS is expected to drop 25 per cent, according to Reuters data.

Sime Darby, created through a merger between three plantation groups in 2007, holds 844,000 hectares of plantation land spread over Asia and Africa, making it the world's largest by its land bank.

Indonesian plantation firms, equipped with vast land resources, are growing fast and could overtake Sime.

Sime Darby is trading on a 2009 forecast price to earnings multiple of 25, the same as rival IOI Corp and lower than Wilmar's 28. Its return on equity at 9.2 per cent is lower than 14 for IOI and 13.6 for Wilmar and 33 for Astra Agro.

Many investors want Sime Darby to list its crown jewel division to enhance its appeal as a pure play plantations firm.

'Sime should consider an IPO next year because valuations will be attractive, while equity and crude palm oil markets would be on a better footing,' said Kaladher Govindan, head of research at TA Securities.

'That is what Wilmar seems to be gunning for,' said Mr Kaladher, referring to Wilmar's planned US$3 billion IPO to float its China business in Hong Kong.

Sime Darby, however, does not expect to immediately list its plantation business as part of a detailed review of its operations, a source with direct knowledge of the plan, told Reuters yesterday.

'Not really. It (the listing) is not on the cards. People are just talking. People have asked us about this but no,' said the source, who did not want to be identified due to the sensitivity of the matter.

Last year, Sime Darby exited a US$2 billion submarine cable job carrying electricity from Borneo island to mainland Malaysia.

Some analysts say that Sime Darby could follow in the footsteps of Indonesia's finance-to-automobiles conglomerate PT Astra International Tbk , which separately listed its plantations business Astra Agro more than a decade ago.

Astra Agro stands as a pure oil palm estate owner, offering investors a direct exposure to its lucrative plantation cashflows and into the global palm oil industry worth US$45 billion annually or even more.

'Something like Astra . . . would be positive for Sime in terms of a purer plantation play. Of course, investor interest would be more on the plantation, rather than its holding company,' said an analyst at a foreign brokerage in Kuala Lumpur.

Despite its size, Sime benefits the least from a positive crude palm oil (CPO) price trend, Morgan Stanley said.

A 10 per cent rise in CPO prices adds only 5 per cent in Sime earnings, while such a swing would raise Astra Agro's earnings by 13 per cent, the investment bank said in a note.

But a spin-off of the plantations business, may not go down well with Sime Darby, which has said that it wants the company to remain a conglomerate.

It has recently added to its diverse portfolio with new acquisitions in energy and healthcare. -- Reuters