Sembcorp Industries

Sembcorp Industries’ 2Q15 net profit grew 24.9% y/y to $223.6m, lifted by a disposal gain of a UK water unit. Otherwise, earnings would have declined 5.7% to $168.9m, bringing the 1H15 figure to 42% of full year estimate.

For the quarter, revenue slid 5.8% to $2.39b, broadly across its segments with the marine division slipping 9.9% to $1.21b due to lower revenue recognition of its rig building projects.

Turnover for its utilities business continued to be hampered by lower high-sulphur fuel oil at its Singapore operations, partially mitigated by the commencement of its 65% owned 1,320MW coal-fired power plant in India as well as contributions from recently acquired Sembcorp Green Infra (SGI).

Gross margins improved by 1.6 ppt to 14.8% but earnings were weighed by:
1) Higher finance costs of $56.6m (+242%) following consolidation of SGI, commencement of TPCIL’s Indian operations and marine’s higher borrowings
2) Larger FX loss of $25.6m, including forwards (2Q14: $9.2m)
3) Doubtful debt provision of $2.1m by Sembcorp Marine

Share of results from associates and JVs of $58.5m ((+32.6%) helped to pare the weakness at the operating level, with higher contributions from wind operations in China (write-back of doubtful debts following receipt of government subsidies), from Vietnam, as well as Nanjing and Chengdu urban development projects.

The group also booked a $54.7m gain on its sale of Sembcorp Bournemouth Water Investment in the UK in Apr ‘15.

Interim DPS payout of $0.05 has been maintained, implying a forward dividend yield of 4.3%.

Management expects 2015 to remain challenging for Singapore utilities with continued competition (Hyflux’s Tuaspring power plant commissioning in 2H15) in the power market as well as low oil prices. However, its overseas ventures should continue to deliver steady contributions from the following projects

1) Full operations at TPCIL power plant (India) by 3Q15
2) NCC Power Project (India) to be completed in 2016
3) Wind power capacity expansion (China)
4) Myingyan IPP project (Myanmar) in 2017

Prospects of its marine division remain dim as persistently low oil prices have prompted capex cuts by oil majors. On the Brazilian drillships that have suspended payments since Nov ’14, management continues to explore all options including slowing down construction.

SCI is currently trading at 8.9x forward P/E, and 1x P/B. Despite a wave of post-results TP cuts, the counter was up 4.3% to $3.61 in morning trade.

Recent broker ratings:
HSBC maintains Buy but cuts TP to $5.14 from $5.32
UOBKH maintains Buy but cuts TP to $5.00 from $5.10
OCBC maintains Buy but cuts TP to $4.31 from $4.40
CIMB upgrades to Add from Hold but cuts TP to $4.02 from $4.30
RHB upgrades to Buy from Neutral but cuts TP to $3.90 from $4.10
Deutsche maintains Hold, cuts TP to $3.90 from $4.10
Credit Suisse maintains Neutral, cuts TP to $3.80 from $4.20
Maybank-KE maintains Hold, cuts TP to $3.60 from $4