• Decent core 2Q17 results
• Interim div cut to S$0.03/share
• Downgrade to HOLD

Decent 2Q17 Results; One-off Refinancing Costs

Sembcorp Industries (SCI) registered a 23.2% YoY (+6.3% QoQ) rise in revenue to S$2.3b and a 13.1% increase in gross profit to S$326m in 2Q17. However, higher general and administrative expenses (+20.7% YoY, +29.7% QoQ) and higher finance costs (+58.1% YoY, +11.9% QoQ) led to a 36.1% YoY fall in net profit to S$55.3m in 2Q17.

This brought 1H17 net profit to S$174m, which is a decent set of results considering the one-off refinancing costs incurred for the India power plant SGPL of about S$33.9m in the quarter. Utilities’ net profit was S$43.0m in 2Q17, or S$76.9m if the refinancing costs were to be excluded. This compares to S$74.6m net profit in 2Q16. Unsurprisingly, marine’s contribution to net profit was S$3.3m in 2Q17 vs. S$7.1m in 2Q16. As for urban development, net profit from the segment was S$8.5m in the quarter compared to S$6.2m a year ago.

Operational Updates

Currently, the SGPL power plant has yet to secure long-term PPAs and is expected to incur losses for the year. With regards to this, management mentioned that it is prepared to ride the down-cycle as it is a long-term investor who believes in the longer-term prospects of the Indian power market. In Singapore, the centralized utilities, gas and solid waste management businesses are expected to remain steady, but the power business continues to face intense competition.

Downgrade to HOLD on Valuation Grounds

With regards to the strategic review, management remains tight-lipped, merely updating that it is halfway through the review, and expects it to be completed by 4Q17. Management mentioned that the group seeks to take a prudent approach in whatever it does, but also wants to be agile and capture opportunities when the market recovers.

Finally, SCI has reduced its interim dividend from S$0.04/share last year to S$0.03/share in 1H17, as it has a dividend policy of about 30% payout, and the group seeks to be prudent and conserve cash for now. We fine-tune our estimates and our fair value estimate slips slightly from S$3.48 to S$3.43. As upside to our FV is less than 10%, we downgrade our rating to HOLD.

Source: OCBC Research - 4 Aug 2017