08/06/2011 (Borneo Post) - The unprecedented move by Sime Darby Plantation Sdn Bhd (Sime Darby Plantation) to raise salaries of its 37,000-strong workforce will not affect parent Sime Darby Bhd’s (Sime Darby) earnings forecast for this year.

On Monday, the Sime Darby’s plantation group announced that effective this July 1, workers at its estates and mills across the country would each take home an extra RM200 on top of the current monthly basic pay scale.

In his remark, Sime Darby’s president and group chief executive, Datuk Mohd Bakke Salleh said such increases were allocated towards recognising workers’ contribution, especially in the high crude palm oil (CPO) price environment, stressing that “the benefits coming out of this exercise will outweigh the cost,” he was quoted in a statement on Monday.

“The 2011 estimate will not be affected as the new salary structure only comes into effect from the first month of 2012,” noted TA Securities Holdings Bhd’s (TA Securities) analyst James Ratnam via e-mail yesterday.

It was reported that Sime Darby’s management expected costs to increase by RM120 million to RM130 million per annum, which would include higher statutory contributions namely for Employees’ Provident Fund (EPF) and Social Security Organisation (SOCSO).

To this, Ratnam commented further, “While we view the exercise as part of Sime Darby’s social service agenda, the impact will be largely offset by comparatively higher CPO prices. After all, Sime Darby is a GLC (government-linked company) and it is naturally expected to support the government’s social policies.

“We expect the one-off pay rise to incur on top of the annual salary adjustment – which for plantation companies typically range between five to seven per cent per annum – and already accounted for in our earnings forecasts.”

Citing the group’s statement, Ratnam mentioned that Sime Darby would also spend another RM30 million to RM35 million per estate to upgrade housing and other amenities – known as Central Housing Complex – for its plantation workers.

Given all circumstances, Ratnam underscored Sime Darby as one of the top picks in the plantation sector despite TA Securities’ slight downward revision on the stock.

Illustrating further, he said, “We estimate the higher labour cost translates into an increase in CPO production cost by RM50 to RM54 per tonne. Meanwhile, average CPO  production cost is expected to increase by 4.7 per cent year-on-year. As a result, earnings per share will decrease by 2.5 per cent annually over the next two years.

“Correspondingly, our target price on Sime Darby will reduce to RM10.90 from RM11.19 previously. Despite the downward revision in target price, potential upside is an attractive 18-per cent; therefore, we maintain Sime Darby as a ‘buy’ stock.”