Analysts positive on Sime’s decision


  • Business
  • Friday, 27 Jun 2008

KUALA LUMPUR: Analysts are generally positive on Sime Darby Bhd's decision not to take up an equity stake in Sarawak Hidro Sdn Bhd that will be undertaking the undersea cable project.

Sarawak Hidro is the owner of the 2,400MW Bakun hydro-electric dam.

Second Finance Minister Tan Sri Nor Mohamed Yakcop said the Government had not made a decision on who would take up Sime Darby's share in Sarawak Hidro.

“We haven't made a decision on whether it'll go to foreign companies. The option is not closed but, for now, we feel that it's better if a local company takes over,” he told reporters after the launch of the Business Leaders Forum yesterday.

Nor Mohamed said discussions would be held with Tenaga Nasional Bhd (TNB) and other stakeholders to find alternatives. “TNB can take up the stake but it’s the undersea cable project that is the issue because it's important,” he said.

He said the project’s cost had not been finalised but the Government was taking measures to make sure that the prices quoted by suppliers would be “fair and reasonable.”

Kenanga Research head Yeonzon Yeow said in a note to clients that “the decision to pull out is positive.” He said the high cost of implementing the undersea cable project would make it economically not feasible. The cost was estimated late last year at RM9bil.

Yeow is maintaining a “buy” on Sime Darby with a target price of RM12.40. “Our forecast and valuation have never included the Bakun hydro-electric project concession,” he said.

In a report, AmResearch Sdn Bhd executive director Azharuddin Nordin said Sime Darby's decision might be related to the project not making the group's internal rate of return (IRR).

“We understand that Sime (Darby) has a high target IRR of mid-teens,” he said, adding that the IRR was also dependent on the level of the power-purchase agreement with TNB.

Azharuddin said the undersea cable project presented several risks to the group, such as cost and power loss. Aseambankers Malaysia Bhd head of research Vincent Khoo said in a report that although the announcement by the group came as a “total surprise,” it viewed the withdrawal from the project as implying that management would return its focus to core operations.

However, he said, there were questions over who would take over the group's 60% equity stake in Sarawak Hidro and whether TNB, which was expected to take up a 20% stake in the company, would pull out too.

Khoo said the other question to ask was what would happen to the plans for electricity off-take from the Bakun project? “Will the electricity off-take be localised (from within Sarawak alone) or will the Government continue with the undersea transmission plan?” he asked.

Khoo said so far, RM3bil had been spent on the civil works portion of the dam (including financing). “Outstanding in the costing will be the mechanical and electrical works portion (earlier estimated to be at least RM4bil) and the overhead transmission and undersea cables (earlier estimated at RM9bil),” he added.

CIMB Research analyst Ivy Ng said in a report the current and potential stakeholders of Sarawak Hidro, the Federal Government and Sarawak state might take a higher stake based on indications that the former was looking at an alternative measure to continue the plan to supply electricity to Peninsular Malaysia.

She said it would come as no surprise if Sarawak Energy Bhd, the state's sole electricity supplier and other power independent producers were keen on the power plant and the undersea cable projects.

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