2Q13 below expectations, downgrade to Hold. Sembcorp Industries’ (SCI) reported 2Q13 revenue of SGD2.5b (-6% YoY, +6% QoQ), with PATMI of SGD165m (-13% YoY, -7% QoQ). Results were below our expectations with 1H13 PATMI of SGD342m making up 42% of our previous FY13F forecast due to weaker Marine contribution (which we attributed to timing recognition). Utilities and Marine segments accounted for 53% and 39% of 1H13 PATMI respectively. While Utilities performed well this quarter due to China and Middle East contributions, we expect Singapore operations to suffer from weaker electricity sales on lower power prices, estimated to have dropped by about 15% YoY in 1H13. We cut our SOTP-based TP to SGD5.48 and downgrade the stock to a HOLD given the limited upside.

Contributions from new cogen capacity to be delayed. SCI’s 400MW cogen plant expansion on Jurong Island could only see contribution from 2Q14 as opposed to 4Q13 which was initially expected. While SCI is expected to complete plant construction by Sep 2013, the grid connection to the national power grid would only be ready in 1Q14, which SCI has no control over. In addition, intensifying competition in the Singapore power and gas market is expected to suppress domestic the performance of the Utilities segment’s.

Growing overseas investments. We see SCI actively growing its overseas business for the Utilities segment in order to diversify its exposure to the domestic market. Contributions from some of its key projects (India – TPCIL, UAE – Desalination expansion and UK – Energy from Waste facility) would only be operational and contributing progressively from mid-2014 onwards.

Downgrade to Hold, TP SGD5.48. We cut FY13-15F net profits by 3- 7% as we reduce Utilities estimates on the back of lower power spreads and delayed contribution from its cogen plant. We also factor in revisions to our Marine segment estimates following SMM’s 2Q13 results. Our SOTP-based TP consequently falls to SGD5.48 and we downgrade the stock to a Hold. Potential re-rating catalysts could come from the IPO of its Salalah IWPP JV company, accretive acquisitions or higher-than-expected overseas assets contributions.

Source: Maybank Kim Eng Research - 7 Aug 2013