SEMBCORP Industries' H1 2012 results met both our expectations and consensus expectations at 48 per cent of our FY2012 earnings projections. Better gas sales in Singapore and the full commissioning of the Salalah plant were the key contributors. We tweak our EPS for lower margins in the Marine segment, offset by stronger growth in Utilities. Our sum-of-parts target price is reduced to $6.48 to reflect our downgrade of Sembcorp Marine's target price.
We still expect Utilities Singapore (which contributes 70 per cent of the Utilities group profits) to deliver 11 per cent y-o-y earnings growth in FY2012 despite the upcoming 40-50 days outage from a planned major inspection of the co-generation plant (likely in Q4 2012). The resilience stems from the full-year contribution of GSA II (its second gas sales agreement with Indonesia) and stronger gas sales in subsidiary SembGas.
This was evident in Q2 2012 as Utilities Singapore's net profit of $64 million (up 36 per cent y-o-y) was driven largely by additional sales of gas.
The independent water and power plant (IWPP) in Salalah, Oman (445 megawatts, 15 million imperial gallons per day seawater desalination) achieved full commissioning in May with incremental earnings of about $6 million. This lifted the Middle East (together with Fujairah) net profit to $11.6 million in Q2 2012, above our forecast of $7 million. Management expects to receive enquiries for capacity expansion in 2013, which could provide earnings upside in 2015/16.
Sembcorp Industries is our top pick in the conglomerate/big cap offshore and marine sector for its attractive valuations. We believe it is a safe bet in a choppy market with volatile oil prices given its lower correlation to oil prices at 55 per cent (from April 2012) against the 80 per cent correlation for Keppel Corp and Sembcorp Marine.
It is the cheapest conglomerate at 6x 2013 enterprise value/Ebitda versus its peer average (Keppel Corp and ST Engineering) of 11x. Its Utilities stub is also cheap at 8x 2013 P/E versus regional utilities peers of 12x. Maintain "outperform".
OUTPERFORM
OUTPERFORM
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