May 11, 2010, The Borneo Post (http://www.theborneopost.com/?p=29352)

Sime Darby claims extra RM700 mln for Bakun

KUCHING: Malaysia’s multinational conglomerate involved in plantations, property, industrial, motors, healthcare as well as energy and utilities Sime Darby Bhd (Sime Darby) has put in a claim of RM700 million from the government  in relation to the Bakun project, an addition to an earlier  claim of RM708 million.

In its research report, CIMB Investment Bank Bhd (CIMB Investment) remained negative on this issue because in the past the group had a briefing to refute potential cost overruns on this project as well as the revelation of a substantial cost overrun when the project was 96 per cent completed.

The research house also pointed out if the claim was approved, the total cost of the civil works portion of the project would rise to RM3.2 billion from RM1.8 billion, adding that part of the additional costs could have been due to claims by the mechanical and engineering contractors.

It added that under the terms of contract, Sarawak Hidro Sdn Bhd (Sarawak Hidro), the owner of the project had the option to impose on the civil contractors led by Sime Darby, a back-to-back claim made by the mechanical and electrical contractors.

In addition, CIMB Investment said that Sarawak Hidro had the right to claim up to 20 per cent of the original project cost from the contractors due to the late delivery of the project. As such, the maximum amount for late delivery worked out to be RM360 million for the Sime Darby-led consortium.

In total, the research firm noted the additional loss from the project could be as high  as RM1 billion but the loss could be contained at RM300 million if the additional submitted claims of RM700 million were approved and all other claims against the company were dropped.

In addition, it gathered that the handover had been further delayed to December this year from an earlier deadline of June, which meant the project was 36 months behind schedule.

Furthermore, the quantum of additional loss that the Sime Darby-led consortium had to account for in its upcoming results would depend largely on the government’s willingness to reimburse the additional costs uncovered by the group and waiving all the late-delivery charges that it was entitled to for this project.

However, there was an indication that the group was only willing to absorb RM300 million or 15 per cent of total estimated cost overruns of RM1.7 billion.

Nevertheless, the research house said it was unclear if this was on top of the RM364 million it had provided earlier in the middle of 2006.

Additionally, its view was that the government was unlikely to absorb all the new cost overruns as it attributed these to the poor management of the project and doing so might set a poor precedent for future government projects.

CIMB Investment highlighted that based on its estimates, the group might have to write off potentially between RM107 million and RM227 million from this project due to its 35.7 per cent share of the project, resulting in a four per cent to 8.4 per cent cut to its current year earnings estimates for Sime Darby.

However, it still retained its earnings forecast, which did not include the potential loss from Bakun, as the losses were still to be confirmed.

It remained concerned about the issue as it would negatively impact the sentiment in the stock and investors’ confidence.

Furthermore, it also remained unclear if the government had relieved the consortium of the obligation to pay late delivery charges.

On a related note, although the research house liked the efforts put in by the group to improve efficiency at its various core divisions, these were likely to be overshadowed by the revelation and the handling of the Bakun issues, which would dampen near term earnings momentum.

Although the stocks price over earnings valuation might be more attractive than its peers, it was offset by earnings downside risks due to the Bakun project.

It maintained its RM9.70 per share target price based on a 10 per cent discount to its sum-of-parts value.