ECM Libra Investment Research has maintained its buy call on Sime Darby Bhd at RM6.20 on the premise of improving fresh fruit bunch yields and a recovery in crude palm oil (CPO) prices.

However, the research house said its sum-of-parts derived target price for Sime Darby was adjusted to RM7.30 from RM8.20 previously.

“Besides some adjustments being made to FY10 earnings (-2.4%) for the engineering segment, we are also shifting downwards slightly our FY09 CPO (crude palm oil) price assumption from RM2,500 to RM2,300 per tonne considering that prices have weakened further than expected in 2HCY09.

“Should prices average at RM1,700 per tonne for the rest of the year, it brings 2HCY09 average prices to average at RM2,300 hence a 12% downgrade in earnings,” it said in a recent report.

ECM Libra said it continued to maintain its RM2,300 per tonne assumption for FY10 however, as it expected CPO prices would recover given softening production numbers in the months to come (hence falling stock levels) while substitution effect would also kick in as CPO now trades at a very sharp discount to soy oil.

Meanwhile, commenting on the RM2.8 billion worth of contracts awarded by Petronas to five local fabricators, the research house said Sime Engineering’s portion of the tender was RM1.12 billion given that it has the third largest yard space amongst the rest.

The others who were awarded contracts were Malaysia Marine and Heavy Engineering Sdn Bhd, Ramunia Holdings Bhd, Kencana Petroleum Bhd and OilFab Sdn Bhd.

ECM Libra said Sime Engineering was in much need of order book replenishment as its order book amounted to RM1.2 billion this June compared to its FY08 oil and gas/engineering segment turnover of RM2.6 billion.

“The power plant contract for Mitsui (RM152 million) ended in September and the Maersk Oil Qatar job (RM1.9 billion) would last them until July 2009 only.

“Other than that, the group was awarded some RM500 million in fabrication jobs from Petronas in April this year. This project would bring order book to an estimated RM2.2 billion that would last into 2010 at least, we believe,” it said.

The research house said it expected that come 2010, order book replenishment might come in softer for fabricators, and hence it expected Sime Engineering’s earnings to see a decline.

“We are now factoring this into 2010 earnings following our downgrade of the oil and gas sector from overweight to neutral recently,” it said.

Sime Darby fell 20 sen to end at RM5.80 yesterday.