A year after suffering massive losses from its oil and gas division, Sime Darby Bhd has taken a decision to exit this business by hiving off its two fabrication yards for RM695mil in cash.Sime Darby has inked two non-binding memoranda of understanding to sell its Teluk Ramunia fabrication yard to Petronas Nasional Bhd for RM296mil and its Pasir Gudang fabrication yard to Malaysia Marine and Heavy Engineering Holdings Bhd (MHB) for RM399mil.
Sime Darby said the disposals followed a recent “portfolio review” and that for the oil and gas division to move up the value chain and enjoy better returns, “the group would need to further commit its financial resources into a business which is no longer in line with the group's strategic decision.”
Sime Darby also said the RM695mil price tag was above the RM641mil book value of the said assets.
Explaining the rationale for move, Sime Darby's president and group chief executive Datuk Mohd Bakke Salleh told StarBizWeek: “There are too many variables in this business. You need to depend on the clients' specifications, you have to get your costing right and there are continuous contract management issues. Do we have really have all this expertise?
“Furthermore there is a lot of reliance on third parties or sub-contractors. We don't want to take on jobs with this type of risk profile. This is a business where the likelihood of losing money is very probable.”
Bakke...‘We don’t want to take on jobs with this type of risk profile. This is a business where the likelihood of losing money is very probably.’Interestingly, Petronas' subsidiary, MISC Bhd (itself the parent of MHB) had in 2008 proposed injecting the then unlisted MHB into Ramunia in a reverse takeover of the latter. However, talks fell through and subsequently, Ramunia's fabrication yard was sold to Sime Darby, which is now selling the same yard to Petronas.
Sime Darby had paid RM550mil for Teluk Ramunia, including debts it assumed. It is now receiving about RM250mil less from selling the same yard to Petronas.
Bakke, who was not running Sime Darby when the Ramunia yard was acquired in May 2009, explained that circumstances were different then: “The business direction of Sime Darby was very much on international expansion then. It got a shot in the arm when it was awarded the Qatar projects, hence Teluk Ramunia was acquired to be utilised to undertake big jobs, both internationally and locally.”
Now however, things have changed. “With (oil and gas) fabrication jobs, one can end up losing whatever cash one has and all the resources built up over the years. This is certainly an industry we should not be in. If we can't be a market leader, then we shouldn't be part of it,” he said.
As part of the terms of the sale, MHB will offer employment to all Sime Darby employees in connection with the fabrication yard business on terms to be mutually agreed and that Sime Darby will continue to perform and complete its obligations in respect of its existing contracts.
Meanwhile, CIMB Investment Bank Bhd analyst Ivy Ng said in a report yesterday that the offer price for its sale of its fabrication yards was fair.
“The price tag for the Ramunia yard appears low, at a 47% discount to what Sime Darby paid in 2009. But the group is getting a higher price of RM3.07mil per acre for the smaller Pasir Gudang yard,” Ng wrote, adding the offer price is at 1.08 times book value.
Ng added that potential profits from Sime Darby's existing oil and gas projects “could add another RM86mil to the price consideration, raising the valuation to 1.2 times book value, in line with the value we used for the assets in our sum-of-parts computations.”
Ng also wrote: “We are positive on the group's plan to sell its oil and gas assets as it will remove concerns over potential losses from this division and allows the group to focus on its core businesses.”