Sembcorp Industries - RHB Invest 2015-10-30: Can’t Fight The Tidal Pull

Sembcorp Industries - RHB Securities 2015-09-29: Bubbling Over With Opportunities @ SG ShareInvestor SEMBCORP INDUSTRIES LTD U96.SI 

Sembcorp Industries (SCI SP) - Can’t Fight The Tidal Pull 

  • Sembcorp’s 3Q15 missed estimates due to its receivables provisions and weak SembMarine earnings. 
  • Management also cut its guidance for the urban development unit. 
  • Altogether, we trim our FY15F earnings by 7.2%, and downgrade Sembcorp to NEUTRAL (from Buy) with a SOP-based SGD3.90 TP (from SGD4.20, 9% upside). 
  • While we still like its utilities division, which has bright overseas growth prospects, we see elevated earnings risks in its other two segments. 

 Weak 3Q foreshadowed by SembMarine. 

  • Sembcorp’s weak 3Q15 was further compounded by a SGD23m receivables provision in relation to Jurong Aromatics Corp entering receivership, on top of the earnings weakness at SembMarine (SMM SP, SELL, TP: SGD2.00). 
  • Management believes that these receivables will eventually be collected. Apart from this, the utilities business was stable YoY at the core level. 

 Urban development arm now expected to lag FY14 performance. 

  • From an expectation of a “performance comparable to 2014” in 2Q15, management now guides that it will be “weaker in 2015 compared to 2014”. Management described the state government in Nanjing, China as having held back on releasing residential land for sale, instead encouraging Sembcorp to sell industrial and commercial land. While it expects a higher quota for residential sales next year, this comes as an unwelcome development and materially affects our outlook for the group’s near-term earnings and stock performance. 

 Stock unlikely to perform with two weak divisions out of three. 

  • Although we continue to like its utilities business for its growth potential in India and Bangladesh, deteriorating earnings contributions from both the urban and marine divisions would weigh on the group. Earnings volatility has increased in these divisions, prompting us to trim our FY15 earnings by 7.2%. 

 Comparing like for like, we prefer Keppel Corp. 

  • Comparing Singapore’s two major conglomerates in the oil & gas and infrastructure spaces, we prefer Keppel (KEP SP, BUY, TP: SGD10.00) for its higher yield and stable earnings. 
  • We believe SembMarine will underperform in the near term, exacting a tidal pull on Sembcorp as weak yard earnings (both in Singapore and Brazil) continue their operational drag. 
  • Downgrade to NEUTRAL with a SGD3.90 TP (from SGD4.20).

Lee Yue Jer CFA RHB Research | 2015-10-30
RHB Research SGX Stock Analyst Report NEUTRAL Downgrade BUY 3.90 Down 4.20