Sime profits plunge, loss provisions rocket, worst still to come

Wong Choon Mei, Malaysia Chronicle

FINAL UPDATE In a sign that the worst is yet to come, Malaysian conglomerate Sime Darby reported a full-year net profit of RM726 million or about one billion less than market forecasts after booking loss provisions totaling a whopping RM2.1 billion for its debt-heavy energy and utilities division.

For the fourth quarter ending June 30, 2010, the group reported a net loss of RM77.4 million versus RM1 billion in the same quarter of the preceding year. For the full year ending June 30, 2009, Sime had reported a net profit of RM2.3billion.

The energy and utilities division reported an operating loss of RM1.7 billion for 2010 after making additional provisions of RM777.3 million in the fourth quarter.

"As we suspected, it was pretty bloody. The thing is, the end is not in sight yet because Bakun is not generating profits yet. In other words, at this point in time, we are still looking into a bottomless pit," a stocks analyst told Malaysia Chronicle.

A consensus of 28 research houses compiled byBloomberg Analytics had expected Malaysia's largest conglomerate to announce a net profit of RM1.7 billion on the back of a RM32.6 billion revenue. But this was without taking into account any further chunky provisions in Q4.

Disaster 'national' projects

In May, Sime shocked the market by announcing it would make a loss provision of RM964 million in its third-quarter results. The provisions were for 4 projects: RM200 million for the Qatar Petroleum project, RM159 million for the Maersk Oil Qatar project, RM155 million for the Marine project and RM450 million for the Bakun project.

It must be noted that Sime also said in its press release the additional RM777.3 million provision in the fourth quarter was for the three oil and gas projects, but not for Bakun.

“We have identified the problems in the Oil and Gas business and are addressing them to turn around the business. Furthermore, we are collaborating with strategic partners to strengthen our capabilities,” Sime's acting CEO Mohd Bakke Salleh said in the statement released after market hours.

However, former premier Mahathir Mohamad recently admitted that for Bakun alone, the provisions should be at least RM1.8 billion.

It is an open secret that Sime, whose biggest shareholder is the Malaysian government and its agencies, still takes 'orders' from top politicians of the day. In fact, most of the big deals that its enters into are negotiated with the influence of the federal government.

For the nine months ended March 31, 2010, the total provision for the four projects amounted to RM1.3 billion. Adding in the additional provision in the fourth quarter, the total burden to full-year profits came up to RM2.1 billion.

There has been speculation that Sime might make a provision of as much as RM1 billion in the fourth quarter alone. However, pundits say given the political pressure on Sime to show a profit, Mohd Bakke may have held back.

"Definitely there was political pressure. If Sime were to go into red ink, there will a shudder in the stock market although more from the psychological impact than anything else," the analyst said.

"A loss would have symbolized the worst mismanagement possible and that business and politics are still intertwined in Malaysian Government-Linked Companies even though they are publicly-listed and should actually subject their business considerations to the strictest corporate governance and best practices."

May divest core asses, major group restructuring ahead

At a press conference held later, Mohd Bakke said it was possible that Sime may have to divest core assets in a bid to trim off the excess fats. “We have just started the exercise. My hunch is that we will only know in the earlier part of next year,” he said

He also revealed that Sime will be going through a major restructuring exercise by turning all six of its divisions - plantation, property, industrial, motors, energy and utilities, and healthcare - into individual anchor companies.

All six companies will have its own board of directors consisting of members of the main board, senior management, independent directors and industry experts.

“We received endorsement from the board of directors today. The companies will be 100 percent owned by Sime Darby Berhad but it will focus on management and provide more board attention. We are working with the view of implementing it on Jan 1, but we will need to go back to the board first with details,” Bakke said.