Sembcorp Industries

Kim Eng on 14 May 2012

Strong delivery from Utilities. Sembcorp Industries (SCI) delivered a good set of 1Q12 results, where a strong pickup in Utilities business compensated nicely for the decline in the Marine business. Group revenue rose to SGD2.4b (+21% YoY, +8% QoQ) while net profit came in at SGD176.7m (+10% YoY, -30% QoQ). We raise our SOTP-based target price to SGD6.20, and upgrade SCI to a BUY.

Further additions to earnings streams. Utilities business surpassed that of the Marine business, accounting for 54% of total net profit, versus 38% from the latter. Additional gas sales in Singapore and  higher High Sulphur Fuel Oil prices contributed to the strong performance. Development pipelines for its Utilities business are on track, with the Salalah IWPP and Jurong Island IWWT plant expected to be completed in 2Q12 and 3Q12 respectively. Looking further into 2013 and 2014, we see further additions to income streams from other projects, namely, Banyan Cogen and Multi-utilities facility on Jurong Island, Andhra Pradesh coal-fired power plant in India and Fujairah desalination plant in UAE.

Growing its renewable energy portfolio. Last week, SCI also announced the acquisition of 4 wind power assets and a coal-fired power plant in China for USD85.5m, adding to its renewable energy portfolio, which currently makes up 5% of its energy portfolio. SCI aims to grow this proportion to 10-15%, in line with major power players, so that it would be in a balanced position if carbon taxes are being imposed on its non-renewable energy business.

Still positive on Marine business. We continue to be positive on its Marine business and emphasise that the lower 1Q12 numbers were a result of timing issues and not underperformance. We expect record order wins for the Marine business this year. Current net orderbook is already at SGD7.4b with SGD3.0b in contract wins YTD.

Looking attractive, upgrade to BUY. We raise our SOTP-based target price to SGD6.20, according higher valuation to its Marine and Utilities businesses. The recent pull-back in share price has also made the stock look attractive from a valuation perspective.