Published September 7, 2009

MALAYSIA INSIGHT
Merits of a Chinese stake in Sime

M'sia can't go wrong if it ties palm oil giant's fortune to world's fastest growing economy

By S JAYASANKARAN
KL CORRESPONDENT
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LAST week a report in a local news-portal stirred interest among analysts and investors alike.

The Malaysian Insider reported that Sime Darby was mulling a plan to offer up to 10 per cent of its equity in new shares to an entity linked to the Chinese government.

Kuala Lumpur denied the report on Friday but the speculation persists and the talk is that Prime Minister Najib Razak himself wants to see the deal go through. So let us examine it even if it is in the abstract.

Sime Darby, one of Malaysia's largest multinationals and the world's biggest listed oil palm firm, is owned 52 per cent by state agency Permodalan Nasional and a further 14 per cent by the Employees Provident Fund, another state-owned pension plan. With a 6 billion share capital base, it is one of the largest stocks on the local bourse and a 10 per cent share placement would, at current market prices, fetch the company roughly RM5 billion (S$2 billion).

Does it need the money? Not really: its net debt stands at RM2 billion which represents a 9 per cent net gearing level while it has strong cash flows.



On the other hand, the federal government needs money. Its budget deficit is reaching 8 per cent of gross domestic product and Sime could easily channel the money upwards by way of a special dividend or by way of buying a government asset.

In the latter context, Sarawak's Bakun hydroelectric dam comes to mind. Originally, Sime was supposed to take it over but the plan was dropped in favour of the federal government - through three agencies - wholly funding the project.

If the deal does go through, it would also re-rate oil palm stocks across the board. More importantly, it would allow Sime to get into the Chinese market with a powerful partner that might be willing to open doors for it.

Sime is already there - in autos, water treatment, port management, Caterpillar trucks, to name a few - but has had unspectacular results. It had to write off sizeable losses on its auto business there around two years ago.

The firm has since said that it wants to spend RM3-4 billion on edible oil refineries in China. Alone among Malaysian-related firms, only the Kuok group - through its Singapore-listed Wilmar International - has completely integrated palm oil operations in China. For Sime to get there, it would need Chinese help at the highest levels.

Would the Chinese take up the offer? That is less clear as a 10 per cent stake isn't very meaningful. But cash-flush Chinese government linked companies have been snapping up resource assets to bolster security of food supply for its 3.1 billion people.

And the president of China's largest sovereign wealth fund said recently that his fund would increase its overseas investment this year by ten times. So it is not beyond the realm of reason to believe that Chinese firms would not be tempted by an interest in the world's largest listed oil palm company.

The downside, of course, would be a dilution in earnings for minority shareholders. On balance, however, it would seem that the merits of the partnership are far greater and Mr Najib should stay the course.

Hitching a Malaysian company to the fortunes of the world's fastest growing economy surely cannot be wrong - now and in the future.