• 4Q to be weaker for India
• India IPO depends on market conditions
• Continues capital recycling efforts

3Q18 Results Within Expectations

Sembcorp Industries (SCI) reported a 36.3% YoY rise in revenue to S$3.0b but saw an 11.6% drop in net profit to S$82.3m in 3Q18, such that 9M18 net profit accounted for 71% of our full year estimate, in line with expectations. The lower net profit was mainly due to the marine segment.

Utilities core net profit was S$101m, a 20.7% increase over 3Q17, with its India operations delivering a S$28.9m profit and China’s Changzhi water treatment plant and Chongqing SongZao both contributing positively to the group. Urban development continued to deliver steady profits.

India Continued to Post Profit, But 4Q Likely to be Weaker

India continued to perform well with S$39.4m and S$28.9m net profit in 2Q18 and 3Q18, respectively. For 4Q, however, it is likely to be comparatively weaker due to the low wind season and plant outage which is covered by Business & Interruption insurance.

Compensation from insurance is likely to be obtained but there is a lagged effect, so it will only be reflected post 4Q. For 2018, India is expected to be profitable.

As Expected, Makes Additional Provisions for Wastewater JV

As expected, the group has also made additional provisions for potential fines relating to an alleged discharge of off-spec wastewater by one of its majority-owned JV wastewater treatment business. The provision was S$25m in 3Q18. Together with the S$25.4m provision made in 4Q17, the total provision made amounts to S$50.4m. Recall that SCI’s proportionate share of the total potential fines/claims could amount up to S$100m.

To Continue Capital Recycling Efforts

Looking ahead, SCI will continue on its capital recycling efforts to sustain growth. As announced earlier, the group expects to divest up to S$500m worth of utilities assets over these two years. This excludes the proposed IPO of the India business, which the group is still pursuing.

The IPO depends on market conditions as well, and we do not rule out the possibility of a delay if market conditions are not right. We tweak our estimates and update our SOTP-based valuation, such that our FV estimate slips from S$3.53 to S$3.30.

Source: OCBC Research - 5 Nov 2018