Thursday, November 23, 2006

Mega Merger Of Sime Darby, GHope & Guthrie
The Good, The Bad & The Ugly

Well, its about time, and I thought it was never going to happen. Both Golden Hope and Kumpulan Guthrie have performed well in share price returns this year, while Sime Darby has been ignored. Based on pure palm oil play and the biodiesel rally, Golden Hope has gained some 21% over the last 6 months year while Guthrie has registered a scorching 53%, meanwhile Sime Darby just beat my savings account rate coming in at 2.5%. Is this to save Sime Darby? Despite that underperformance, there isn't a shadow of a doubt that the management at Sime is still top tier.... although they could do with a bit of reinvention and strategic shifts.

Already Sime Darby has been dragged lower due to the aversion by fund managers from conglomerates, why add more slices of bread to the pudding? In fact, Sime Darby would be better advised to properly distinguish the various business units into a cleaner structure. The work is only halfway done, you have: Sime Properties, Sime Engineering. What you need is also Sime Energy & Utilities, Sime Manufacturing, Sime Infrastructure and Sime Plantations. Then take Sime Darby private, and leave the business units listed. All capital needed for business ventures would be raised via these business units. If Sime Darby stays listed when the plate is so huge, even when all units make a lot of money, it would not be reflected in the real value behind Sime Darby. As you can raise funds via the seperate business units, there is no longer a need for the holding company to be listed.

If I was the adviser, I would use the listed vehicles of Golden Hope and Guthrie to inject the various assets to align the business, for example I can inject all plantations into Golden Hope, and all infra related businesses into Kump Guthrie. I betcha that would make a lot more sense. It also streamlines management of business units and not by listed vehicles which may have similar businesses under different unit managers.

Size, its all about size. We need more big swings dicks in the market place. Sime's market cap is RM15.2b, Kump Guthrie's at RM4.1b while Golden Hope is at RM7.4 b = RM26.7b (finally a stock with a decent US$7.5b market cap). In fact, if they follow the formula to create listed seperate units the total market cap could be boosted by another 10%-15% at least (RM3b is nothing to be sneeze at).

Things that look good on paper - economies of scale in terms of management of resources. Sime Properties suddenly looks very good with the prime pieces of development under Guthrie, and I think it would be a much easier sell under the Sime UEP Properties banner.

That is also why I have rated PNB as the better manager of resources and in strategic planning. As all 3 come under the banner of PNB, it just makes sense. Look forward to a favourable VSS - its a good thing, a better redeployment of resources. It also makes for better leveraging based on Sime Darby's superior managerial layers of professionals.

The one thing Sime Darby has not been that good in, its when they go overseas, they need to buckle up, get better people and do more vetting of partners. Their HK and China record could be much better. CONSOLIDATE then REFOCUS. Malaysian companies once they get big will want a finger in every pie, that's OK, just manage them as seperate business units and allowed to be valued and listed as such. Even the wonderful General Electric is a conglomerate that can be valued and managed clearly via business units - but they also get rid of non-performing units very fast. Sime needs to learn to do that, or rather PNB has to give Sime the leeway to do that.

1 comment:

simon_alibaba said...

Sime management SucKS!, Look what happen to KLGCC after they takeover. Can't even manage a golf course properly, even kill the prestige of the club.

Why Capital Gains Tax Should Not Be Implemented

I have to reiterate why a Capital Gains Tax is a very bad idea for Malaysia. Unique traits of Malaysia: a) Very open economy b) Ringg...