SINGAPORE (Nov 6): Sembcorp Industries announced that its 3Q17 earnings dropped 37.7% to $33.6 million from $53.9 million a year ago.
Revenue declined 15.5% to $1.81 billion from $2.14 billion the previous year due to a drop in the group’s marine segment revenue, but was partially offset by higher contributions from Utilities in Singapore and India operations.
See: Sembcorp posts 38% fall in 3Q earnings to $33.6 mil on weak marine business as expected
Despite the negative results, Phillip Capital continues to recommend investors to “accumulate” on Sembcorp Industries with a target price of $3.70.
In a Monday report, analyst Chen Guangzhi says that Utilities in Singapore continues to deliver strong growth, with net profit from Singapore seeing a 52.1% increase to $51.4 million, driven by 105% y-o-y increase in net profit from the energy segment.
Singapore operations continue to benefit from the improvement of centralised utilities and gas divisions despite the intense competition.
However, Utilities’ India operation was dragged by losses from Sembcorp Gayatri Power’s (SGPL) of $26 million, due to the worsening of spark spread since the power tariff was lower while coal price trended up.
SGPL is currently still operating on short-term rolling contracts.
Meanwhile, Sembcorp Marine (SMM) generated $1.7 million in net profit for 3Q17 compared to losses of $21.8 million in 3Q16. The 9M17 net profit slightly grew by 3% y-o-y to $28 million, but it incorporated the gain from the divestment of COSCO stake for $46.8 million.
Thus, profitability did not turn around YTD.
On the outlook, the analyst expects SGPL to suffer from the fluctuation of spark spread and the power spot price currently is coming near the cash cost.
“We believe SMM will have more order flows from non-drill solitons. However, it will take time for it to improve the profitability,” says Chen.
On the other hand, OCBC has downgraded its rating on Sembcorp to “hold” from “buy” previously, but with an increased target price of $3.59.
The group’s earnings were within the research house’s expectations.
In a Friday report, analyst Low Pei Han says that the downgrade came after the group’s management updated that it is in the final stages of the strategic review and results will be disclosed soon.
In the near term, the group’s earnings outlook for utilities looks dim, given earnings pressure in India and the end of a profitable concession in China.
“We incorporate our higher fair value estimate for SMM in our sum-of-parts valuation, and roll over our valuations for the utilities business to FY18 earnings, such that our fair value estimate for SCI rises from $3.43 to $3.59,” says Low.
Since OCBC’s last upgrade to the stock in Aug 23, it has performed well, appreciating by 15% compared to STI’s 4% rise over the same period.
As at 2.30pm, shares in Sembcorp Industries are trading 6 cents lower at $3.24 cents or 1.1 times FY17 book with a dividend yield of 1.9 times.
