By Khairie Hisyam
In six full financial years after the Synergy Drive merger, Sime Darby Bhd has not seen a stable growth trajectory in terms of earnings. Additionally its market value has declined. Is it time to break the conglomerate up?
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Last Friday, on April 4, Sime Darby Bhd closed at RM9.26, putting its market capitalisation at RM56.1 billion.
That is 5.7% lower from the RM59.5 billion value when the conglomerate re-entered the stock market on Nov 30, 2007 after the 2006 Synergy Drive merger. In the meantime the FBM-KLCI, the barometer of stock market performance among large companies has steadily grown over the years.
On Nov 30, 2007, the FBM-KLCI or just KLCI as it was then closed at 1,396.98 points. Last Friday the benchmark index closed at 1,856.61 points. This means in a bit more than six years, the index has grown by a third.
Perhaps a more fitting comparison would be a plantations company making up the 30-company benchmark index, say Kuala Lumpur Kepong Berhad (KLK), given that roughly half of Sime Darby’s earnings come from its plantation division. Last Friday, KLK closed the trading session at RM23.62, putting its market capitalisation at RM25.16 billion.
That represents an increase of 49.5% since Nov 30, 2007 when KLK’s market capitalisation was at RM16.83 billion — a growth of over RM8 billion in a six-year period.
But market capitalisation aside, how is Sime Darby doing six years after the exercise? KiniBiz briefly examines the financial performance of the group across that period to get an idea of what the group has been doing.
No stable trajectory
Sime Darby has seen six full financial years since the merger and is now beginning its fourth quarter for FY14, which ends June 30, 2014. However the group’s performance throughout the years has not been on a stable trajectory.
For the first few financial years after the merger, Sime Darby saw its revenue trend downwards from RM34 billion in FY08 to RM31 billion in FY09, though recovering to RM32.8 billion in FY10. During this period the group saw its pre-tax earnings decline sharply from RM5.2 billion — a group record figure at the time — to RM1.74 billion in FY10.
Similarly, net profits declined from FY08 through FY09 to FY10, from RM3.51 billion in FY08 to RM726.8 million two financial years later.
According to Sime Darby, the decline in FY09 was mainly due to its Plantation Division seeing 56% less operating profits, mainly due to lower average crude palm oil (CPO) prices, compared to the previous financial year, while the continued drop in FY10 was due to losses in its oil and gas and engineering units, which were two major businesses of its Energy and Utilities Division.
Notably that division posted a massive RM1.75 billion in pre-tax losses, an episode which KiniBiz will examine further later in the series to see whether it could have been prevented if a different corporate structure had been in place.
However, FY11 and FY12 saw the group’s revenue and pre-tax earnings rise to RM47.6 billion and RM5.72 billion respectively, the latter figure representing a record high post-Synergy Drive. Net profits also rose over the two financial years to RM4.15 billion in FY12.
The great jump in FY11, representing a year-on-year (y-o-y) revenue, pre-tax profit and net profit increases of 27.4%, 212% and 404% respectively from FY10, was primarily due to better showing from the Plantations, Industrial and Motors divisions, said Sime Darby. As for FY12, all divisions showed improved earnings bar Plantations, whose earnings declined slightly.
However this was somewhat reversed in FY13, where all divisions bar Property and Motors posted lower earnings. Plantations, the biggest contributor, saw 37.4% lower contributions compared to FY12.
For the current financial year to end-June 2014, Sime Darby’s key performance indicator (KPI) target is RM2.8 billion in terms of net profit, lower than the previous year’s figure of RM3.7 billion by about a quarter. Sime Darby president and group chief executive Mohd Bakke Salleh said the group is on track to achieve the KPI. It’s not clear how the KPI was set though.
“The group has undergone a challenging six months as the global economic and business environment continue to be volatile,” said Mohd Bakke when presenting the group’s half year results last February. “Nonetheless we remain resolute in our focus on improving operational efficiencies across the group and ensuring that each division addresses their challenges.”
The emerging picture is that Sime Darby had not been able to chart a consistent growth path as its separate divisions, despite being in different industries with different risk profiles from each other. This is because the bulk of its earnings come from one division — plantations — and there is still considerable variation year-to-year in the performance of other divisions.
Accordingly, the volatile plantations division — contributing more than half Sime Darby’s earnings except FY13 when it comprised 41.3% — has been a major influence on whether group earnings rise or fall, despite other divisions seemingly being more stable in terms of revenue growth.
The earnings stability that was supposed to accrue to Sime Darby as a conglomerate simply did not happen.
Is there a better path forward?
With that in mind, the fact that Sime Darby has five different divisions — plantations, industrial, motors, property and energy and utilities — involved in five different core businesses raises the question of whether the senior management can provide adequate focus in ensuring each division performs optimally.
“(The current structure) may not be the best in terms of focus, so putting all these different segments under one company may not be the best idea,” said an analyst to KiniBiz on the matter.
Taking the question further, can each division perform better if they were listed separately instead of being grouped under one listed entity?
“On their own with independent management, why (won’t they)? One thing is there would be more transparency,” said another analyst. “However there are always pros and cons (to such spin-offs).”
That said, the current conglomerate structure has its own benefits, said Sime Darby group chief Mohd Bakke Salleh.
“Sime Darby Berhad is structured as a conglomerate and the strength of this model is widely known,” said Mohd Bakke in an emailed response to KiniBiz. “The inherent strength of the Group’s diversified portfolio of businesses in the Asia Pacific region provides us an earnings stability and a strong balance sheet.”
“The strong fundamental enables the Group to enjoy better borrowing cost, for example,” added Mohd Bakke.
However, the evidence is that earnings stability has not materialised as pointed out earlier. Balance sheet strength, yes but that can be as much a blessing as a curse when divisions can engage in projects much larger than their capability as we shall see later.
On separately listing its divisions, Mohd Bakke said such an exercise is only one way of enhancing value and comes with both pros and cons. As for the group, it has embraced its conglomerate business model and is focused on being a market leader in its different businesses under the group’s strategy blueprint, he added.
“The group’s focus on this strategy is reflected in significant decisions such as the exit from the oil and gas business and the joint venture of its healthcare business with an international partner for further growth,” said Mohd Bakke in his email to KiniBiz.
Spin-offs already under consideration
It must be noted however that the idea of spinning off one or more of Sime Darby’s divisions is not a new idea, even to the group’s senior management.
Last December when presenting the group’s 1Q14 results, Mohd Bakke had said that Sime Darby is looking at its Indonesian plantation business and examining the possibility of a separate listing.
“We are exploring the option and avenue of expanding the business by either merging with the existing businesses or just going to the market, do an IPO (initial public offering) and unlock value, and use the proceeds to expand further,” he was quoted as saying.
Notably, Sime Darby’s property arm had seen much talk of a potential Bursa Malaysia listing over the past few years, and last July Sime Darby Property managing director Abdul Wahab Maskan said such a prospect is in the air though the details are being worked out.
However when asked by KiniBiz last February whether the property arm spin-off is ready to go to market, Mohd Bakke said “not yet”. But if Sime Darby does undertake another restructuring exercise to break off some or all its divisions, what would the new structure look like?
And how can such a break-up be done for maximum benefit to its shareholders?
Tomorrow: How to break up Sime Darby
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