• Competitive SG power market
• Utilities growth overseas
• Downgrade to HOLD

2Q14 results slightly below

Sembcorp Industries (SCI) posted a 1.4% YoY rise in revenue to S$2.5b and a 8.3% increase in net profit to S$179m in 2Q14, such that 1H14 net profit accounted for 45% of ours and the street‟s full year estimates. This is not surprising given the weaker-thanexpected marine results which we saw earlier. Net profit from the utilities business fell 17% YoY to S$92.8m, while marine saw a 5% rise to S$79.8m in the quarter. Meanwhile, urban development saw a 32% rise in net profit to S$4.8m.

Utilities – tough in Singapore, growth overseas

Utilities segment was mainly affected by lower contribution from Singapore‟s energy operations due to lower spark spread; competition in the Singapore power market has “intensified”. However, overseas operations, which accounted for 48% of net profit in 1H14, are expected to deliver continued growth. Looking ahead, TPCIL‟s (SCI‟s first power plant investment in India) first 660MW unit is currently undergoing precommissioning, and commercial operations are expected by the end of this year. Construction of the NCCPP plant, which is located adjacent to TPCIL, is now 46% completed and is expected to come onstream in early 2016. Finally, the expansion of Fujairah 1 desalination capacity is about 57% completed. SCI‟s pipeline of projects is expected to increase its power capacity by more than 70% and its water and wastewater treatment capacity by more than 20% over the next three years, enhancing recurring earnings.

Land sales in China and Vietnam to underpin urban devt

On the urban development side, the segment is expected to deliver a comparable performance in 2014, underpinned by land sales in China and Vietnam. About 75ha of land were sold in 1H14, and the group‟s net order book stands at 213ha. Total remaining land available for sale is about 3,629ha.

Downgrade to HOLD

SCI has proposed a maiden interim dividend of S$0.05/share. In fact, the group historically has not paid an interim dividend – only final and special dividends were given. For now, we will still be keeping our full year dividend forecast at S$0.17/share, same as last year. Meanwhile, after tweaking our estimates and with our lowering of SembMarine‟s fair value, our SOTP-based fair value also slips from S$6.17 to S$5.64. Downgrade to HOLD.

Source: OCBC Research - 7 Aug 2014