A131 BKAL 3063 INTEGRATED CASE STUDY

SUGGESTED ANSWERS
QUESTION 1
(a) Describe the performance of Sime Darby Berhad from 2007 2012 using any TWO (2) of these
perspectives: financial strength, profitability, efficiency, and management effectiveness.
(i) Financial Strength
Year Ended
30 June (RM
million)
Current assets
Current
liabilities
Current ratio
Debt to
equity ratio

2011
22,449.0
0
13,168.7
0
1.70
0.28

2010

2009

2008

2007

18,607.80

17,959.10

19,529.60

16,943.10

11,340.30

10,607.30

9,307.50

8,597.10

1.64

1.69

2.10

1.97

0.36

0.25

0.22

0.31

Two ratios of financial strength: current ratio and debt to equity ratio.
The current ratio of Sime Darby ranges between 1.64 and 2.10, which occurs in the year 2010 and
the year 2008, respectively. Current ratio of 1.64 indicates that Sime Darby has deficient coverage
of current liabilities in the year 2010 as compared to other years. Current ratio of 2.10 indicates
that Sime Darby has superior coverage of current liabilities. The higher the ratio in the year 2008
suggests that Sime Darby has greater assurance that current liabilities will be paid. Sime Darby
has better financial strength in the year 2008 than the later years (2009 onwards).
Debt to equity ratio, the lowest value occurs in the year 2008, at 0.22 times. The highest debt to
equity ratio occurs in the year 2010, with a value of 0.36. The higher debt to equity ratio indicates
that the long run viability and the ability of Sime Darby to cover long term obligations. When
the proportion of debt financing is higher, the higher are the resulting fixed charges and repayment
commitments. So Sime Darby has also increased its risks of shareholders by increasing leverage.

(ii) Profitability
Year Ended 30
June (RM
million)
Profit before tax
Profit for the year
Revenue
Pre-Tax Margin
(%)
Net Pofit Margin
(%)

2011

2010

2009

2008

2007

5,449.20
3,847.90
41,858.80

2,818.60
854.80
32,506.20

3,128.90
2,340.80
28,921.00

5,217.80
3,752.50
31,838.80

3,528.50
2,683.10
26,866.50

13.02

8.67

10.82

16.39

13.13

9.19

2.63

8.09

11.79

9.99

Profitability of Sime Darby: pre-tax margin and net profit margin.

Pre-tax margin reflects the profit before tax as a percentage of revenue. It is found that the highest
pre-tax margin occurs in the year 2008, at 16.39% but then declined to the lowest value of 8.67%
in the year 2010. This indicate pre-tax profit is relative to revenue generated by Sime Darby in
the year 2010 is not as good as in the year 2008. Sime Darby shows inferior performance. This
deteriorating in performance is also consistent with the results of net profit margin, which shows a
huge decline from 11.79% in the year 2008 to only 2.63% in the year 2010.

(iii) Efficiency
Year Ended 30
June (RM million)
Revenue
Total assets
Asset turnover
(times)

2011

2010

2009

2008

2007

41,858.80
42,866.20

32,506.20
37,577.60

28,921.00
35,439.90

31,838.80
35,972.70

26,866.50
33,213.80

0.98

0.87

0.82

0.89

0.81

Asset turnover is one of the measures for efficiency.

Asset turnover measures the intensity with which companies utilize assets. It reflects the productivity
of assets and the ability of a company to use its assets to generate revenue. The lower the total asset
turnover ratio as compared to historical data for the company and industry data, the more sluggish the
company's revenue. This may indicate a problem with one or more of the asset categories composing
total assets such as inventory, receivables, or fixed assets. The lowest assets turnover occurs in the
year 2007, at 0.81, and the highest asset turnover occurs in the year 2011. This asset turnover
ratio indicates that Sime Darby is quite efficient in managing its assets in the later years as
compared to the earlier years. However, the assets turnover ratios for the period 2007-2011 are all
below 1.0. Sime Darby should analyze the various asset classes to determine in which current or
fixed asset the problem lies. The problem could be in more than one area of current or fixed assets.

(iv) Management effectiveness

Year Ended 30 June
(RM million)
Profit for the year
Total assets
Shareholders equity
Return on assets
(%)
Return on equity
(%)

2011

2010

2009

2008

2007

3,847.90
42,866.20
24,030.30

854.8
37,577.60
20,450.10

2,340.80
35,439.90
21,384.80

3,752.50
35,972.70
21,668.60

2,683.10
33,213.80
17,354.30

8.98

2.27

6.60

10.43

8.08

16.01

4.18

10.95

17.32

15.46

There are several ratios that can be used to measure management effectiveness. One of the ratios is
return on assets.
It is the key to analyzing how effectively and efficiency Sime Darby is in managing its assets to
generate return. From the analysis, it shows that return on assets is higher in the year 2008 at
10.43% but it drops significantly to only 2.27% in the year 2010. This result indicates that Sime
Darby did not manage its assets efficiently after the year 2008. However, Sime Darby effectively
managed it assets in the year 2011 relative to year 2010, indicated by an increase in return on
assets from 2.27% to 8.98%. In terms of return to shareholders, similar pattern of return is
observed. Shareholders did not gain so much from their investment in the year 2010. However,
starting from the year 2011, it can be said that Sime Darby has provided better return to its
shareholders with return on equity of 16.01%.
NOTE: Accept ANY 2 of these perspectives: [i] financial strength, [ii] profitability, [iii] efficiency,
and [iv] management effectiveness that described Sime Darbys performance
(20 Marks: 10 Marks for each)

(b) Forecast the potential future undertaking of Sime Darby Berhad.

Using the analyst recommendations and revisions, 12 BUY recommendations made by the analysts
but none SELL recommendations. The consensus estimates analysis on sales and earnings per
share indicate that both items show an increasing trend from the year 2012 until 2014. The
profitability ratios for the year 2012 show that Sime Darby Berhad has a better performance as
compared to a group of comparable companies in the Industry or Sector for the year 2012.
Based on the above explanations, it can be said that the future undertaking of Sime Darby Berhad is
forecasted as good.
NOTE: Students must also include profitability discussion in (a) to strengthen their discussion of
Sime Darbys potential future undertaking.
(10 Marks)

QUESTION 2
(a) Identify THREE (3) issues in Sime Darby Berhads case.
Accept any THREE issues from this list:
Main Issue:
Project delays that have contributed to the cost overruns so Energy & Utilities Division faced severe
financial difficulties following the financial year end results 2009 due to mismanagement and
misconduct of the President & Group Chief Executive and four directors in Energy & Utilities
division that has affected the corporate governance and financial position of Sime Darby Berhad.
Or issues highlight as follows:
i) a big conglomerate has overnight transformed from overperform to underperform stock;
ii) credibility and integrity of Sime Darby Board necessitate the need to design manual on how to
improve Board effectiveness;
iii) more than RM 1billion in cost overruns for a GLC requires a query to internal audit department;
iv) lapses in operational efficiency and poor project management;
v) ineffective systems and processes review for capacity utilization;
vi) poor supervision of the enforcement and regulatory agencies (Securities Commission); insider
trading and manipulation.
vii) complex diversification of business venture has complicated the management decision process to
expand and bringing wealth to the company
viii) No expertise and inexperience to enter into billion dollar projects yet they took the risk thus
causing delays and cost overruns in 4 major projects: QP, MOQ, Marine and Bakun.
ix) Lack of corporate governance thus affected financial performance of the company
x) Coalition among top officials in these 4 major projects in E&U Division

(6 Marks: 2 Marks for each issue)

(b) Analyse and discuss the issues.

Analyse the paragraphs from The Shaking Started.
Use the the exhibit to show
(i)
difficult handling of diversification of Sime Darby businesses,
(ii)
poor governance structure,
(iii)
poor financial performance that has lead to ineffective strategy,
(iv)
lack of expertise and
(v)
capacity to execute due to the complex nature of the corporation.
As a result of the above issues, Sime Darbys Board seriously has to consider the implications with
regards to the management and internal controls of the Group, and has to take stringent measures to
punish all erring members to serve as deterrent and strengthen policies through manuals to prevent
future occurrence.
Stakeholder confidence has to be enhanced to boost public trust. In the foregoing, the integrity of the
market will be at stake if market manipulation and insider trading could be excused on the false grounds
that it makes the market, provides excitement, and opportunities to make money for both traders and
brokers.
This is based on the fact that, the purpose of the market is to provide a place where investors and other
stakeholders can seek a fair value of their investments through an equitable and transparent process that
provides equal access to information and opportunities for both traders and brokers, and in compliance
with regulatory rules.
The Sime Darby case portrays fears that the basic aim of the capital market of serving the economy
seems to be lost, as more privileged market participants are favored to make money in less than
honorable ways. So, investigations have to be made by the authorities and perpetrators should be
brought to justice.

(18 Marks: 6 Marks for each analysis and discussion)

(c) Recommend TWO (2) strategies to sustain Sime Darby Berhads business.
The answers may include but not limited to the followings:
The main issue is the project delays that have contributed to the cost overruns. To overcome the issues,
there are possible strategies that could be implemented:
(i)

Project Management and Scheduling

The company needs to utilise the operation management tools such as Gantt Charts, PERT and
CPM. All these tools are good in term of coordinating and foreseeing the interdependence of
activities (i.e. critical to follow the sequence of completion or not).
In the context of Bakun project, for example, the management should identify the activities that
could be done without waiting for other activities to be completed.

(ii)

Target Costing
Traditional costing is not appropriate to be used in a contemporary challenging environment. In
the context of this case, the revenue has been contracted (fixed), through the bidding process. The
management should think of using target costing, that ensure continuous monitoring of the costs
incurred.
Target costing sets the profit (and also the profit margin) that the company wants to achieve, and
by working backward (from the given/contracted revenue and the targeted profit), the company
knows the limit of the cost that can be incurred.
Subsequently, the management should monitor the cost incurred through the cost controlling
measures such as variance analysis, activity based management and others.

(iii) Knowledge and expertise in the related field

In running the awarded projects, SDB should ensure that there are people who possessed required
knowledge and expertise in the particular field or project.
The employees/workers must be equipped and trained with the respected skills needed to perform
the job being assigned. For instance, the Marine Project which involves the construction of two
tug-boats and a Derrick Lay barge. These projects require specialized skills and knowledge which
could not simply be assigned to general workers.
If SDB lacks the experts in carrying and completing these projects, the company should hire the
experts or consultants to oversee and monitor the projects at all phases until it is fully complete.
Similarly, SDB should also consider the experts to run the Bakun Project. Lack of experts could
also be the contributing factor to the increase in cost and delay in completing the project.

(iv)

Improve Corporate Governance mechanism

The board of directors and the top management of SDB should carry out their duties with
integrity and honest as they are being trusted to run the company by the shareholders who are the
owners of the company. The management should carry out their duties ethically and play their
roles to oversee the projects so that it is carried out properly and according to the planned
schedule. Furthermore, they should also avoid from their self-interest and the interest of people
related to them or let themselves to be influenced by other parties so as they can perform their
role independently and free from influential parties.
As a fiduciary duty, the board places higher premium on the shareholders to safeguard and
encourage flow of investments. However, it appears the Board in Sime Darby lacks the ability to
manage resources by its failure to effectively watchdog management inefficiency in executing
huge operational projects and investments. This inability has a direct relationship with the need
for efficient corporate governance strategy for sustainable future for all key market stakeholders
in Sime Darby.
Hence, the inadequacy of effective corporate governance has worked to the detriment of
shareholders and created a class of stakeholders who could lose interest in the financial system. In
addition, it is very unlikely that senior executives be involved in such huge mismanagement
without the boards knowledge. And if the board was not aware, then board has to be blamed for
negligence of duty.
The oversight functions of the audit committee and its composition has to be reviewed, as well as
the institutional, legal and capacity upgrade that is obviously of critical importance to the
development of corporate governance in the company.
In addition, the appointment of external auditors (PwC) by the board to investigate the matter
appears odd, considering that the firm was the external auditor of Sime Darby. There could have
been a possibility that E&U division has been incurring cost overruns over the past few years
when PwC audited Sime Darbys accounts. Issues such as the credibility of the external auditors
appointed can serve as important highlight.
However, since there may not be right or wrong answer, students can present arguments stating
that it is unlikely that other board members are complicit in the fraud considering the fact that a
work-group across the board raised the alarm, and are still working and helping with investigative
authorities on the matter. In addition, based on the legal framework, there are due processes when
a fraud case is unearthed before blames are apportioned and punitive actions taken.

(v)

More vigilant Government regulatory agency (Security Commission)

SC should be more vigilant in its monitoring of the firms, especially in respect of evaluating the
capacity of Sime Darby on venture contracts and execution processes in handling projects.
We live in a cynical world, where not all market participants do the ideal as stipulated in the
Laws, thus when the general enforcement environment is weak and specific enforcement
mechanisms function poorly, as in many cases in both advanced and developing economies, few
of the corporate governance mechanisms are effective, and this can lead to fraud.

The SC needs to verify if is there sufficient capacity by Sime Darby to execute projects, and a
well- defined result framework initiative that can be subject to evaluation. The SC should
determine to a large extent the level of the venture to be executed, examine the contractual
agreements, and assess adequate funding and resource persons to handle operations and technical
processes.
In addition, Security Commission should monitor and review progress of the venture to ensure
safeguards of investor assets and optimum capital utilization to prevent Sime Darby from
incurring material losses of such magnitude.

(vi)

Increase the number of independent directors

Sime Darby should increase the number of independent directors and specific monitoring of the
directors roles.

(vii) More transparencies of major projects

As a GLC, Sime Darby management executives should improve disclosure of all major project
activities to the public so that information can flow directly. Negotiations between key
stakeholders needs to be transparent and communicated. Systems and processes needs to be
strengthened.
NOTE: Students are required to give 2 strategies. Total mark for each strategy is 8 marks. In each
strategy, the marks will be given based on how good the students could elaborate/articulate the
application of approaches/tools in solving the problems. Extra marks also should be rewarded if students
could put arguments on the positive relationship between project delay and cost overruns.
(16 Marks)

QUESTION 3
(a) Do you agree with the statement made by OSK Research Sdn Bhd? Justify your answer. (accept
any relevant answer)
There are 2 possible answers:
1. AGREE with the statement, and the blame should not be put on the CEO alone. This is because:
i. The massive loss incurred by SDB is not a result of a one-man misdeed. Being a big
conglomerate GLC, it takes more than one person to commit the wrongdoings.
ii. Other directors, for e.g. the chairman, should also be responsible for the losses and should be
dismissed together with the CEO while the investigation is underway. From the transparency and
accountability perspectives, the dismissal of the CEO alone is inadequate.
iii. Although the CEO is responsible for leading the development and execution of the Companys
long term strategy and responsible for all day-to-day management decisions, the board retains
control over the management and ultimate decision-making process of the company.
iv. The board is the ultimate caretaker of a company as it works to protect the interests of
shareholders. This means that they are also responsible for the loss. At the very least, the directors
need to offer their resignation.
v. The board should perform a thorough investigation to expose those who are aware of the scandal
but keep silent about it, whether they are members of the SDB board, or the subsidiaries boards,
or the executives of the Energy and Utilities division.

2. DISAGREE with the statement in that I feel that the CEO alone should be blamed and bear the
consequences. This is because a CEO:
i. is responsible for leading the development and execution of the Companys long term strategy
aiming at maximizing shareholder value,
ii. is responsible for all day-to-day management decisions, and for implementing the Companys
long and short term plans, and
iii. acts as a direct liaison between the Board and management of the company and communicates to
the Board on behalf of management. The CEO also communicates on behalf of the Company to
shareholders, employees, Government authorities, other stakeholders and the public.

More specifically, the duties and responsibilities of the CEO include, among others, the following:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.

xii.
xiii.
xiv.
xv.
xvi.
xvii.
xviii.

to lead, in conjunction with the Board, the development of the Companys strategy;
to lead and oversee the implementation of the Companys long and short term plans in
accordance with its strategy;
to ensure the Company is appropriately organized and staffed and to have the authority to hire
and terminate staff as necessary to enable it to achieve the approved strategy;
to ensure that expenditures of the Company are within the authorized annual budget of the
Company;
to assess the principal risks of the Company and to ensure that these risks are being monitored
and managed;
to ensure effective internal controls and management information systems are in place;
to ensure that the Company has appropriate systems to enable it to conduct its activities both
lawfully and ethically;
to ensure that the Company maintains high standards of corporate citizenship and social
responsibility wherever it does business;
to act as a liaison between management and the Board;
to communicate effectively with shareholders, employees, Government authorities, other
stakeholders and the public;
to keep abreast of all material undertakings and activities of the Company and all material
external factors affecting the Company and to ensure that processes and systems are in place to
ensure that the CEO and management of the Company are adequately informed;
to ensure that the Directors are properly informed and that sufficient information is provided to
the Board to enable the Directors to form appropriate judgments;
to ensure the integrity of all public disclosure by the Company;
in concert with the Chairman, to develop Board agendas;
to request that special meetings of the Board be called when appropriate;
in concert with the Chairman, to determine the date, time and location of the annual meeting of
shareholders and to develop the agenda for the meeting;
to sit on committees of the Board where appropriate as determined by the Board; and
to abide by specific internally established control systems and authorities, to lead by personal
example and encourage all employees to conduct their activities in accordance with all applicable
laws and the Companys standards and policies, including its environmental, safety and health
policies.

On the other hand, the chairman and other directors are not responsible for the day-to-day management
decisions of the company. It is the CEO who communicates the affairs of a company to its board. The
CEO is entrusted by the board to manage the company judiciously, failing of which the former is held
responsible.
(10 Marks)

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(b) Assuming that you are one of the Group Chief Executive Officers who lead one of the divisions
in Sime Darby Berhad, discuss FOUR (4) aspects that you would consider in deciding on tendering
or bidding for a project? (accept any relevant answer)
Internal factors such as:
(i) Companys ability/capability
- Companys experience, expertise in-term of human and non-human capital
- Financial conditions
- Profitability
- Companys future plan
(ii) The roles and responsibilities of CEO should be included in this discussion
External factors such as:
(i) Risk and return of the project
- The risk facing by the company such as market trend, future market
- Prediction Return in-term of financial and non- financial such as image, etc.
(ii) Economic conditions
- Current and future local economy prediction/data
- Market orientation/global market
- Global economy
- Future development of that area by the authority
(iii) Nature of the project/types of contract
- Are the projects having non-controllable risk like effect by the weather, government
policy, etc.
- Location/country of that project
- Types of contract like cost plus or fixed price
- Short term or long term
- Information regarding the project must be in substance not in form
(iv) Any other related factors
- Competitor of that project
- The students may provide different ideas/classification and should be accepted if related
and have rationale.
(20 Marks)

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