MARC said today that its MARC-1ID /AAAID /Stable ratings on Sime Darby Berhad’s (Sime) Islamic debt issuances were unaffected in the near term following the company’s announcement that it expects its second half year results for the financial year ending June 30, 2010 (FY2010) to be impacted by RM964 million in losses as a result of four loss-making projects under its Energy and Utilities Division.

According to MARC’s preliminary analysis, the negative impact of RM964 million on Sime’s second half-year results would be manageable in relation to the group’s earnings, debt leverage and liquidity position. Sime’s financial results for the six months ended December 31, 2009 (1HFY2010) showed a 7.1% increase in unaudited consolidated pre-tax profit to RM1.76 billion. MARC expects 1HFY2010’s satisfactory performance, and a fairly strong set of results for 2HFY2010 from Sime’s plantation division given the favourable crude palm oil (CPO) price environment, to partially offset the weak performance of the Energy and Utilities Division. MARC also notes that the group continues to maintain a strong liquidity position as reflected by RM4.45 billion in cash and bank balance vis-à-vis short-term debt obligations of RM3.3 billion as at 1HFY2010. In addition, the group’s debt-to-equity ratio of 0.31 times and shareholders’ funds of RM22.38 billion as at 1HFY2010 continues to provide the group with a significant capital buffer.

Sime announced on May 13, 2010 the findings of a board committee it had established back in October 2009 to assess the corporate governance and performance of the Energy and Utilities Division. The group had disclosed that the division was encountering delays and cost overruns on four projects, including the Bakun hydroelectric dam project. Potential cost overruns attributable to the group on account of Sime Engineering Sdn Bhd’s 35.7% effective interest in the project is estimated at RM450 million. Additionally, the group has decided to reverse RM200 million of revenue recognised in FY2009 for the Qatar Petroleum project, make an additional provision of RM159 million for the Maersk Oil Qatar (MOQ) project on top of the RM367 million loss recognised in 1HFY2010, and is likely to incur a RM155 million loss for vessel construction of two tug boats and a Derrick Lay barge for use in the MOQ project. MARC is mindful that some of the projects continue to present challenges that could affect Sime’s profitability over the short to medium term, and will continue to monitor developments with respect to each of the four projects.

Contacts:
Rajan Paramesran, 03-2090 2233/ rajan@marc.com.my;
Benjamin Yab, 03-2090 2270/ benjaminyab@marc.com.my