SINGAPORE (Oct 8): CGS-CIMB Securities continues to rate Singapore conglomerates as “overweight” as limited organic growth has forced them to go beyond their existing turf.
Notably, in the past six months, Sembcorp Industries acquired mini-power plants in the UK for about £286 million ($518.2 million) and ST Engineering acquired nacelle manufacturer MRA Systems at US$630 million ($870.5 million).
Meanwhile, Keppel Corporation proposed to gain control of M1, which could cost up to $1.28 billion, to transform the group into a hybrid cloud giant in the longer term.
In a Friday report, analyst Lim Siew Khee says, “We expect q-o-q declines in 3Q18 earnings for Singapore conglomerates/O&M names, except for stronger marine and electronics (ST Engineering).”
The research house has a “add” call on Keppel with a target price of $8.82.
“We estimate Keppel’s 3Q18 net profit at about $277 million (-9% q-o-q, -5% y-o-y), mainly due to the absence of one-off gains of $60 million (dilution of Keppel DC REIT placement and net fair value gain from Nassim Woods redevelopment). We expect gains of $114 million from the completion of Beijing Aether’s divestment,” says Lim.
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Keppel’s investment division likely turned around with the Tianjin land sale, but the O&M sector is expected to still be in a loss in 3Q18.
CGS-CIMB has an “add” rating on Sembcorp, with a target price of $$3.49, and estimating that the group’s 3Q18 net profit will come up to approximately $78 million (-5% q-o-q, -14% y-o-y), mainly due to fewer lumpy land sales in urban development.
Utilities India should turn in lower q-o-q profit of $25 million (3Q18: $39 million) with the absence of cost recovery but sustained strong renewables and spot power prices.
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Meanwhile, SGPL could still expect to see a loss of about $5 million, compared to a $3 million loss last quarter, as 3Q18 average spot price was 8% lower q-o-q. Plant utilisation was also lower for SGPL at around 76%, compared to 91% in 2Q18, but steady for TPCIL at 87% from 88% last quarter. Hyflux Tuaspring bid could be in focus.
“We expect Sembcorp Marine to report narrower losses of $20-25 million for 3Q18F (2Q18: $56 million loss) with the absence of one-off loss of $27 million from the completion of West Rigel sale,“ says Lim.
On the other hand, ST Engineering is also kept at “add” with a target price of $3.80 by the research house. The group is estimated to deliver 3Q18 net profit of $140 million, 19% higher q-o-q and 9% higher y-o-y.
“Marine was likely the key driver with stronger ship repair as its US yard started to gain traction in rig repair in the US. Conro (container roll on – roll off) provision was likely minimal. Aerospace could report 18% q-o-q decline in profits due to the absence of $9 million divestment gain from Airbus Helicopter. Focus likely to be MRAS acquisition status and production ramp-up potential,” says Lim.
Meanwhile, the analyst estimates Yangzijiang Shipbuilding’s 3Q18 net profit to come up to RMB700 million ($140.8 million), a 30% drop q-o-q and 20% decrease y-o-y, with less than 10 vessels being delivered and shipbuilding gross margins of 16.5%, compared to 21% last quarter.
As at 11.35am, shares in Keppel, Sembcorp and ST Engineering are trading at $7.15, $3.00 and $3.50, respectively.
