Reports by my boss Shahriman Johari and colleagues Presenna Nambiar, Zaidi Ismail and Farah Naz Karim.
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KUALA LUMPUR: Malaysia’s second most valuable listed group, Sime Darby Bhd, has asked its chief to leave after the conglomerate looks set to book losses of almost RM1 billion for the second half of this year. Analysts expect its shares to open lower today after the group revealed that it had cost overruns in not one but four projects in its energy and utilities division.
For now, executive vice-president of the plantation division, Datuk Azhar Abdul Hamid, is acting group chief executive officer as the board’s nomination committee looks for a new leader.
For now, executive vice-president of the plantation division, Datuk Azhar Abdul Hamid, is acting group chief executive officer as the board’s nomination committee looks for a new leader.
“Sime Darby will miss its key performance indicator target and there are concerns on its financial performance in the second half of the year,” said CIMB regional research analyst Ivy Ng.
Sime Darby is booking a loss of RM200 million for its Bulhanine and Maydan Mahzam project with Qatar Petroleum, RM159 million for the Maersk Oil Qatar (MOQ) project, RM155 million for building of vessels for the MOQ project and RM450 million for the Bakun hydroelectric dam project.
However, the conglomerate is still in talks with its clients regarding claims on cost overruns. Sime Darby chairman Tun Musa Hitam said the group’s board of directors found deficiencies in the management of the group’s energy and utilities division after more than eight months of investigation.
However, the conglomerate is still in talks with its clients regarding claims on cost overruns. Sime Darby chairman Tun Musa Hitam said the group’s board of directors found deficiencies in the management of the group’s energy and utilities division after more than eight months of investigation.
The board first set up a three-member work group, headed by Datuk Seri Andrew Sheng Len Tao, in October, following “questionable positions” in the group’s finances last year and the application of corporate governance. What started out as a probe into one project later expanded to another three projects when it found “problems and issues”.
Sime Darby has yet to identify if an element of fraud was involved. Although the work group has submitted its report to the board, Musa said the entire probe was still a work in progress. “Another exercise in terms of action on long-term structural problems that have been identified will be done.”
Part of this will be looking at the management structure, the need for more assistants and having in place proper procedures and a check and balance for management. As to whether Sime Darby would report more similar losses, group chief financial officer Tong Poh Keow said the group had taken the “most conservative stand” and did not expect any more to arise.
At the press conference, Sime Darby said its second-half numbers would be hit by a RM964 million negative impact due to cost overruns in four projects. The group has already booked losses of RM867 million on two projects before.
CIMB's Ng said the provision is much larger than expected and may cause its shares to take a slight beating. Sime stock closed at RM8.65 on Wednesday. The stock was suspended yesterday.
"Sime will miss its key performance indicator (KPI) target and there are concerns about the company's financial performance in the second half of the year. Sime must also appoint a new group chief executive officer fast because investors don't like uncertainties," she told Business Times.
Aberdeen Asset Management managing director Gerald Ambrose, meanwhile, said investors would be surprised that Sime made losses elsewhere and not just at Bakun. "I'm surprised that the management was not aware of it before hand...the market will not be happy."
Ng said analysts were also kept in the dark because Sime did not call analysts for a briefing. "I don't blame them because the management might not be able to answer some of the questions and at the time, there is no chief executive to talk back."
Meanwhile, an analyst at a foreign-owned stockbroking house said Sime shares may not be sold down too much as only 12 per cent are foreign-owned and local funds may buy to take advantage of a lower price.
In Putrajaya, Prime Minister Datuk Seri Najib Razak told reporters that the government has no intention of covering up any weaknesses or losses in government-linked companies (GLC) as it was against the principle of sound corporate governance.
"The roles of the board of directors and management are very clear. Whatever action Sime Darby has taken reflects that they must make decisions that are strict, decisive and transparent," Najib, who is also Finance Minister, said in Putrajaya yesterday.
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Sime probe should be made group-wide A popular line in the corporate world is that about 75 to 80 per cent of all mergers fail. Should Sime Darby Bhd (4197) be in that statistic?
The short answer should be no.
But undoubtedly the revelation of almost RM1 billion in losses would not help its cause. The RM964 million hit is enough to almost wipe out its entire first-half net profit of RM1.11 billion and it could hurt its dividend payout for the year to June 30 2010.
Another damage is likely to be its market value. As at May 12, the group was worth RM51.9 billion, making it the country's second most valuable listed company. It is also quite close to the leader Malayan Banking Bhd, which has a market value of RM53.8 billion.
Its reputation as a major conglomerate would also take a hit as Sime Darby was one of the poster boys of the country's plan to reform its government-linked companies (GLCs). The group is a combination of three listed groups, the so-called mega merger, of Kumpulan Guthrie Bhd, Golden Hope Plantations Bhd and the former smaller Sime Darby.
In fact, Sime Darby could claim to be ahead of its GLC siblings in the race to become a regional champion by 2010 as per the GLC transformation schedule. In 2009, more than two-thirds of its revenue came from abroad. Founded in 1910, the group employs more than 100,000 people in over 20 countries.
So far, what we know now is that there have been questionable decisions related to corporate governance and these mistakes, which are being probed into, would lead to a big hit in its finances. The probe is centred in its energy and utilities division. The board started to probe one project but more questions surfaced on two others.
But the board doesn't plan to initiate a group-wide probe. This is rather unfortunate because minority shareholders would probably be concerned that if corporate governance was poorly exercised in one division, what about the four other core businesses? Sime makes most of its money from its plantation business but it also has interests in property, motors, industrial equipment and healthcare.
The board should establish that it has nothing to worry about from all its other businesses. It has already hired six outside consultants of legal firms and auditors, so it could ask them to expand their checks. Sime chairman Tun Musa Hitam said there was no basis to check other divisions because there is no basis to do so. In other words, no alarm has been raised.
But using a simple analogy, if a room in our house catches fire, we would put it out and check the rest of the house because the same thing could also happen in other rooms.
Datuk Seri Ahmad Zubir Murshid has now paid the price because the losses came under his watch as group chief executive. But what about the board?
There are those who are drawing a parallel to what happened at Maybank and how the lender's board have changed since reporting losses from the purchase of its Indonesian bank.
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