Sime Darby Berhad : Qatar oil and gas unit hit by cost overrun of M$150MM - ALERT

Sime Darby Berhad : Qatar oil and gas unit hit by cost overrun of M$150MM - ALERT


Over the weekend, The Edge Business Weekly reported that Sime's oil and gas unit in Qatar has run into some cost overruns due to rising material cost (namely steel) to the tune of M$150MM. This relates to the M$2.2B project or contract awarded to Sime for the construction and installation of a process platform, a utility platform, and three bridges in an oil and gas development in Qatar.

The report in the Edge also stated that Sime has earlier this month withdrawn a letter of award for sub-contracting works of the Qatar project to Ramunia. This was on the basis that Ramunia's offer price of US$48.3MM exceeded the proposed subcontracted amount of US$40MM.

The reported M$150MM cost overrun accounts for 4% of our FY08E net profit, and works out to just 2.5sen per share for Sime, which is hence not significant. Nevertheless, there are concerns that there may be more cost overruns of this nature given rising cost overall. We will check with management and feedback later.

Overall, the oil and gas division of Sime however currently makes up just 6sen per share or 0.5% of our Dec-08 price target of M$12.80 based on sum-of-the-parts (SOTP). The plantations division makes up the bulk of the SOTP value at over 70%, followed by the property and heavy equipment divisions. (See Table 4 on page 3 of our separate note on Sime Darby dated 13 April already released). Key risk to our price target is less favorable terms for the multi-billion Bakun hydro-electric project.