PP 7767/09/2010(025354)

RHB Research
Corporate Highlights Institute Sdn Bhd
Malaysia
A member of the
RHB Banking Group
Company No: 233327 -M

R e su l ts /B r ief ing N o t e
31 May 2010
MARKET DATELINE

Sime Darby Share Price

Fair Value
:
:
RM8.45
RM7.95
Confidence Still Shaky Recom : Underperform
(Maintained)

Table 1 : Investment Statistics (SIME; Code: 4197) Bloomberg: SIME MK

Net Core EPS Cons. Net
FYE Turnover profit EPS gth PER EPS* P/NTA P/CF* ROE Gearing GDY
Jun (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)
2009 31,013.9 2,255.2 37.5 (38.1) 20.9 - 2.5 15.3 10.6 10.7 2.8
2010f 31,855.9 2,404.1 40.0 6.6 19.6 38.0 2.5 13.8 6.7 22.5 2.8
2011f 35,294.9 2,904.6 48.3 20.8 16.2 54.0 2.3 11.7 13.2 25.2 3.7
2012f 39,784.0 3,056.2 50.9 5.2 15.4 59.0 2.2 11.0 13.2 29.2 4.3
Main Market Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ In line with our forecasts, but above consensus. Sime Darby’s RHBRI Vs. Consensus
9MFY06/10 core net profit came in within our expectations but above Above
consensus, at 78% of our FY10 forecasts and 85% of consensus’ forecasts. In Line
In 3QFY10, Sime recorded a net EI loss of RM1.09bn, comprising Below

provisions for: (1) its Qatar project of RM200m; (2) Maersk Oil project of Issued Capital (m shares) 6,009.4
RM159m; (3) Marine project of RM155m; (4) Bakun project (under its Market Cap(RMm) 47,053.6
35.7% associate) of RM450m; and (5) RM3.4m in net unrealised exchange Daily Trading Vol (m shs) 11.7
loss. 52wk Price Range (RM) 6.70-9.24
Major Shareholders: (%)
♦ EBIT improvement overall. Core net profit rose 35% yoy in 9MFY10 on Skim Amanah Saham
30.9
Bumiputra
the back of an 1% yoy increase in turnover, while EBIT rose 33% yoy. The
Permodalan Nasional Bhd 17.0
improvement in EBIT came from higher margins in the plantations division Employees Provident Fund 11.7
due to higher CPO prices achieved and lower CPO production costs (est -
FYE June FY10 FY11 FY12
3% yoy) and turnaround to profitability for downstream division; higher
EPS chg (%) - - -
margins in the property segment dye to better product mix; higher
Var to Cons (%) 5.3 (10.5) (13.8)
margins in the motor division due to turnaround in profitability for
Australia/NZ region and better economies of scale; and higher margins in PE Band Chart

the energy & utilities division (ex-EI) due to improved margins in the
PER = 22x
power & utilities sub-segment, as raw material costs fell in 9MFY10. This PER = 19x
was offset slightly by lower margins in the heavy equipment division due to PER = 16x
PER = 13x
weaker sales volume and lower economies of scale.

♦ Four key takeaways from the analyst briefing: The analyst briefing
focused primarily on Sime’s oil and gas division provisions and the
corporate governance issues relating to it, although management did touch
on the performance of the plantations division briefly. The key points from Relative Performance To FBM KLCI
the briefing include: (1) outlook for the plantation division; (2) more clarity
on the Bakun dam provision; (3) the extent of the “probe “ on Sime’s other
divisions; and (4) changes that have been made since the recent Sime Darby

discoveries made in the oil & gas division.

♦ Risks include: (1) a convincing reversal in crude oil price trend resulting in FBM KLCI
reversal of CPO and other vegetable oils price trend; (2) weather
abnormalities resulting in an over or under supply of vegetable oils; 4)
increased emphasis on implementing global biofuel mandates and trans-fat
policies; and 5) a slower-than-expected global economic recovery,
resulting in lower-than-expected demand for vegetable oils. Hoe Lee Leng
(603) 92802184
♦ Forecasts and investment case. Our forecasts are unchanged. We hoe.lee.leng@rhb.com.my
maintain our SOP-based fair value of RM7.95 and our Underperform for
now as we believe confidence in management has yet to be restored.

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Table 2 : Quarterly Results Breakdown
FYE June (RMm) 3Q09 2Q10 3Q10 % qoq % yoy 9MFY09 9MFY10 % yoy Comment

Turnover 7,474.0 8,432.7 7,570.7 (10) 1 23,478.9 23,739.8 1 See Segmental Breakdown
EBIT 460.2 978.9 933.8 (5) 103 2,171.8 2,884.6 33 See Segmental Breakdown
Margin (%) 6.2 11.6 12.3 9.3 12.2
Investmt and interest 23.0 27.2 27.1 (0) 18 122.1 75.6 (38)
inc
Interest Expense (67.8) (77.9) (71.1) (9) 5 (195.6) (205.9) 5
Associates & JV (66.5) 2.0 28.7 1,335 (143) (25.9) 55.7 (315)
EI (33.4) (147.0) (967.4) 558 2,796 (108.5) (1,093.5) 908 Includes provisions for Qatar project
RM200m, Maersk Oil RM159m, Marine
project RM155m and Bakun project
(associate) RM450m and RM3.4m net
unrealised exchange loss
Pretax profit 315.5 783.2 (48.9) (106) (115) 1,963.9 1,716.5 (13) Flow through from EBIT and EI
distortion
PBT Margin (%) 4.2 9.3 (0.6) 8.4 7.2
Taxation (149.8) (318.4) (228.6) (28) 53 (632.4) (808.4) 28 Higher as provision for cost overruns
in energy & utilities division not tax-
deductible.
Eff. rate (%) 47.5 40.7 (467.5) - - 32.2 47.1 -
Minorities (15.1) (36.6) (31.1) (15) 106 (35.4) (103.9) 194
Net profit 150.6 428.2 (308.6) (172) (305) 1,296.1 804.2 (38) Flow through from PBT and higher
effective tax rates
Net margin (%) 2.0 5.1 (4.1) 5.5 3.4
Net Profit (ex-EI) 184.0 575.2 658.8 15 258 1,404.6 1,897.7 35
PS (sen) 2.5 7.1 (5.1) (172) (305) 21.6 13.4
DPS (sen) - 7.0 - 5.0 7.0

T/O BREAKDOWN
Plantations 2,430.2 2,737.2 2,524.0 (8) 4 8,495.2 7,981.5 (6) Decrease mainly due to lower
contribution from downstream
operations offset slightly by higher
CPO price (+7% yoy) and higher FFB
production (+3% yoy)
Property 326.7 405.5 520.0 28 59 893.1 1,196.3 34 Increase from higher property sales in
Klang Valley (+41% yoy), offset
slightly by lower sales from hospitality
sub-division (-8% yoy)
Heavy Equipment 1,857.5 2,086.1 1,873.1 (10) 1 5,918.9 5,960.3 1 Improvement in demand from
China/HK (+32% yoy) and Malaysia
(+3% yoy), offset by reduction in
sales to South-East Asia (-17% yoy)
and Australia (-3% yoy)
Motor 1,889.7 2,527.4 2,374.9 (6) 26 5,321.9 7,069.4 33 Higher sales from China/HK (+44%
yoy), Malaysia (+41% yoy), South
East Asia (+23%) yoy and
Australia/NZ (+19% yoy)
Energy & Utilities 799.1 542.1 160.1 (70) (80) 2,325.9 1,156.8 (50) Lower sales from oil and gas (-63%
yoy), offset slightly by +14% yoy
revenue from power & utilities division
Others 170.8 134.4 118.6 (12) (31) 523.9 375.5 (28)
Total 7,474.0 8,432.7 7,570.7 (10) 1 23,478.9 23,739.8 1

EBIT BREAKDOWN
Plantations 143.2 642.0 435.8 (32) 204 1,251.1 1,708.9 37 Higher margins due to higher CPO
prices achieved and lower CPO
production costs (est -3% yoy) and
turnaround to profitability for
downstream division
Property 83.2 77.3 195.8 153 135 187.7 315.0 68 Higher margin due to better product
mix
Heavy Equipment 187.3 189.1 159.7 (16) (15) 623.7 534.6 (14) Lower margins due to weaker sales
volume and lower economies of scale
Motor 23.2 53.6 84.7 58 265 135.7 200.5 48 Higher margins due to turnaround to
profitability for Australia/NZ region
and better economies of scale
Energy & Utilities 35.2 34.0 25.6 (25) (27) 114.8 125.1 9 Excludes EI. Higher margins due to
improved margins in power & utilities
sub-segment, as raw material costs
fell in 9MFY10
Others 11.5 13.5 50.0 270 335 5.1 75.8 1,386
Unallocated expenses (23.4) (30.6) (17.8) (42) (24) (146.3) (75.3) (49)
Total (ex-EI) 460.2 978.9 933.8 (5) 103 2,171.8 2,884.6 33
EI (33.4) (147.0) (967.4) 558 2,796 (108.5) (1,093.5) 908 See above
Total 426.8 831.9 (33.6) (104) (108) 2,063.3 1,791.1 (13)

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 Table 3. Plantation Statistics
FYE Jun 9MFY09 9MFY10 % yoy
Plantation stats
FFB Prdtn ('m tonnes) 7.4 7.6 3
- Malaysia 5.3 5.0 -5
- Indonesia 2.1 2.6 23
FFB Yield (t/ha) 15.4 15.8 3
- Malaysia 17.6 16.9 -4
- Indonesia 11.7 14.0 20
CPO Prdtn ('m tonnes) 1.7 1.8 6
- Malaysia 1.2 1.1 -3
- Indonesia 0.5 0.7 24
CPO OER (%) 21.4 22.0 3
- Malaysia 20.9 21.3 2
- Indonesia 22.4 23.1 3
Ave CPO selling price (RM/t) 2,127.0 2,277.0 7
- Malaysia 2,248.0 2,314.0 3
- Indonesia 1,867.0 2,217.0 19
PK OER (%) 5.0 4.9 -2
- Malaysia 5.2 5.1 -2
- Indonesia 4.5 4.7 4
Ave PK selling price (RM/t) 1,076.0 1,076.0 0
- Malaysia 1,194.0 1,172.0 -2
- Indonesia 771.0 897.0 16

Source: Company, RHB

Briefing Notes

♦ Key takeaways. The analyst briefing focused primarily on Sime’s oil and gas division provisions and the
corporate governance issues relating to it, although management did touch on the performance of the plantations
division briefly. The key points from the briefing include: (1) outlook for the plantation division; (2) more clarity
on the Bakun dam provision; (3) the extent of the “probe “ on Sime’s other divisions; and (4) changes that have
been made since the recent discoveries made in the oil & gas division.

♦ Improving yields and OER, especially in Indonesia. Management expects to be able to grow CPO production
by about 3% yoy in FY10, on the back of FFB yield improvements in Indonesia (which grew 20% yoy in 9MFY10)
and OER improvements in both Malaysia and Indonesia. As this is close to our 3.6% yoy production growth
forecast for FY10, we are leaving our forecasts unchanged. As for the impact of El Nino, management expects this
to only potentially have an impact about nine months later, or towards the 3Q-4Q of CY2010. We have not
imputed the impact of El Nino into our forecasts, given its uncertainty.

♦ Bakun dam – more provisions for JV partners or not? According to management, the RM450m provision it
made for Bakun dam is Sime’s estimation of the total cost to completion and is based on its 35.7% stake,
although there was a certain amount (undisclosed) of provision taken up purely by Sime Darby. However, Sime
intends to continue to discuss this matter with all the other JV partners (with the next meeting scheduled for next
week) in order to come to a decision as to whether more provisions need to be made by the other JV parties.
Besides this issue, Sime will also discuss with the other JV partners if the JV company will submit another claim to
the government for the additional cost overruns.

♦ Not a “probe”, but a “high level review”. When queried about the extent of the “probe” on the other
divisions, management was quick to point out that it was not so much a “probe” but a “high level review” of the
other division’s operations that the company was undertaking, and that so far, there have been no exceptional or
significant issues that have cropped up. Management expects the timeline for this high level review to be
completed by end-CY2010, at the very earliest. Meanwhile, we understand Sime has appointed several external
parties like technical advisors, legal and external audit advisors to look deeper into the oil & gas projects which
have registered losses. This would enable Sime to determine if any fraud was committed, as well as identify and
correct any weaknesses in its controls or operating structure.

♦ Some changes have been made already… While management is loath to point out any specific reasons or any
specific risk factors which were overlooked in the oil & gas division to cause the losses, certain measures have
already been put in place recently, which, we believe, indicates that the problems could have stemmed from the
higher levels of management. These include: (1) the group CEO no longer sitting in Board meetings alone, but
being accompanied by the group COO and the group CFO; (2) the CFO of each division no longer reporting
directly to the CEOs of the divisions, but to the group CFO; and (3) the year end reviews of the divisional CFOs
now also being put under the group CFO, amongst others. Management has also added that the way the group

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 handles business has not changed, but the way they control business has changed, which again, we believe,
means that the main weakness was in the risk management system and controls of the group.

♦ … but it may not be enough. While we believe that management is trying to sort out the problems and issues
within the oil & gas division, we believe the “high level review” being done for the other divisions may not be
enough to assuage investors concerns that these weaknesses in the system are also present in the other
divisions. In addition, many of the answers given by management to the questions asked during the briefing did
not really do much to sooth investors’ worries, especially given the fact that no specifics were mentioned and no
new CEO has been identified as yet. We believe it may take some time before management is able to make the
right noises to give confidence back to the investors.

Risks

♦ Risks to our view. Main risks include: (1) a convincing reversal in crude oil price trend resulting in reversal of
CPO and other vegetable oils price trend; (2) weather abnormalities resulting in an over or under supply of
vegetable oils; 4) increased emphasis on implementing global biofuel mandates and trans-fat policies; and 5) a
slower-than-expected global economic recovery, resulting in lower-than-expected demand for vegetable oils.

Forecasts And Assumptions

♦ Forecasts. No change to our forecasts.

Valuations And Recommendation

♦ Maintain Underperform. We maintain our SOP-based fair value of RM7.95 and our Underperform
recommendation for now, as we believe confidence has yet to be restored.

Table 4. Sum-Of-Parts Breakdown

Division Valuation method Value (RMm)
Plantations CY10 PE 18x 43,216.9
Property CY10 PE 14x 5,310.3
Motor CY10 PE 14x 3,168.5
Heavy Equipment CY10 PE 14x 11,210.8
Energy & Utilities CY10 PE 13x 2,637.5
Others CY10 PE 14x 272.0
Net Cash / (Debt) End 2QFY10 (2,098.0)
TOTAL 63,718.0

No. issued shares 6,009.4

SOP/share (RM) 10.60

Less: Holding co discount 25% (2.65)

Fair Value/share (RM) 7.95

Source: RHBRI

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 Table 5. Earnings Forecasts Table 6. Forecast Assumptions
FYE Jun (RMm) FY09a FY10F FY11F FY12F FYE Jun FY10F FY11F FY12F

Turnover 31,013.9 31,855.9 35,294.9 39,784.0 CPO Price (RM/tonne) 2,450 2,600 2,500
Turnover growth (%) (8.9) 2.7 10.8 12.7 FFB Production Gth (%) 0.5 2.5 1.6

Operating Costs (28,901.9) (29,435.7) (32,218.7) (36,597.1) Heavy Equipmt Op Profit Gth (14.2) 19.6 15.8
(%)
Operating Profit 3,126.1 3,461.9 4,230.2 4,487.7 Energy & Utilities Op Profit 314.0 13.6 8.6
Gth (%)
Property Op Profit Gth (%) 16.4 26.1 18.4
EBITDA 3,944.3 4,459.4 5,333.4 5,690.9 Motor Op Profit Gth (%) 24.0 5.0 5.0
EBITDA margin (%) 18.3 19.3 20.3 21.3

Depreciation (818.2) (997.5) (1,103.1) (1,203.2)

Net Interest (93.9) (186.4) (273.2) (327.6)
Associates 14.5 100.0 90.0 99.0
Exceptionals 24.9 (964.0) 0.0 0.0

Pretax Profit 3,071.6 2,411.5 4,076.7 4,289.5

Tax (730.8) (911.4) (1,019.2) (1,072.4)
PAT 2,340.8 1,500.1 3,057.5 3,217.1
Minorities (60.7) (60.0) (152.9) (160.9)
Discontinued ops 0.0 0.0 0.0 0.0
Net Profit 2,280.1 1,440.1 2,904.6 3,056.2
Core Net Profit 2,255.2 2,404.1 2,904.6 3,056.2

Source: Company data, RHBRI estimates

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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