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Wednesday, November 24, 2010

Tough revamp calls for Sime

Sime Darby Bhd, which is expected to snap its money losing streak in its first quarter results, must stick to its plantation and property businessess but it will have to review the remaining four activities and other smaller units.

The group, which has posted losses for two straight quarters due to provisions, also runs hospitals, distributes cars and heavy equipment like excavators and fabricates oil rigs, among others, under its energy and utilities division.

Sime Darby's acting president and group chief executive officer Datuk Mohd Bakke Salleh said last week that there is a plan to sell some of its assets to better manage the group.

He did not say which divisions can be sold but added that the plan will be presented to the board next year. Sime Darby is also set to announce its first quarter results tomorrow.

Analysts said having many businesses may not necessarily be a good thing due to small margins, little impact to the bottom line and intense competition.
An analyst with RHB Institute said the automotive business as an example is without a doubt a good revenue generator but margins are thin and competition stiff.

"The automotive business is too widespread and business strategies change all the time to suit the market's supply and demand situation.

"To me, what matters most is the long-term bottom line and Sime should just focus on its two core business which are plantations and property," the analyst added.

CIMB Investment Bank Bhd's senior regional analyst Ivy Ng said Sime Darby could sell its non-core business like hypermarket operator Tesco, tyre business or hotel business (Sime has a stake in PNB Darby Park hotel).

A CLSA analyst who declined to be named said Sime Darby could even sell its oil and gas division to potential buyers like Malaysia Marine and Heavy Engineering Bhd.

"However, it might not happen because it just bought Ramunia's fabrication yard, indicating it wants to stay in the business. What is important now is that Sime Darby must seriously look at future tenders and question whether it can really carry out the job or not. Otherwise, it will run into another cost overrun."

Another analyst said the healthcare business is also a good business because it is recession-proof with lucrative future potential.

Meanwhile, Sime Darby is due to report positive numbers for its first quarter due to current high crude palm oil (CPO) prices.

OSK Investment Bank analyst Alvin Tai said the results will be good as CPO prices and fresh fruit bunch production are typically good in the months of August, September and October each year.

An analyst at AmResearch said earnings will be better due to good CPO prices as well as the absence of any major provisions.

CIMB's Ng said earnings should be positive and she expects profit to account for around 20-22 per cent of consensus earnings of RM3.1 billion in fiscal 2011.

Sime Darby made a net profit of RM684.6 million on the back of a RM7.7 billion revenue in its first quarter ended September 30 2009.

By Business Times

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