Sembcorp Industries - CGS-CIMB Research 2018-10-01: Legal Proceedings In Water Utilities

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SEMBCORP INDUSTRIES LTD SGX:U96

Sembcorp Industries - Legal Proceedings In Water Utilities

• Sembcorp Industries’ overseas majority-owned JV in the wastewater treatment business was served with a notice for an alleged discharge of off-specification wastewater. 
• Provision of S$25.4m was already made in FY17 results. The maximum potential claims and fines could amount to S$100m, inclusive of provisions previously made. 
• If full additional provisions of S$75m are made, Sembcorp Industries’ earnings will be reduced by 24% in FY18F or 17% in 2019F. 

Provision of S$25.4m made in FY17

• Sembcorp Industries disclosed a provision of S$25.4m made in FY17 relating to an alleged discharge of off-specification waste water by its overseas majority-owned waste-water treatment JV.

~ SGinvestors.io ~ Where SG investors share

• The latest developments in the case reveal a further claim relating to the same matter. https://sginvestors.io The JV is seeking legal advice to defend against the claim. Sembcorp Industries’ proportionate share of the total potential fines and claims could amount to S$100m, inclusive of provisions previously made.

Impact on group

• We suspect the operations referred to https://sginvestors.io could be the waste-water treatment facility in China. If required to provide another S$75m, it will affect Sembcorp Industries’ earnings by 24% in FY18F or 17% in 2019F.
• We anticipate some profit taking on recent strength in its share price.

Maintain ADD and Target Price of S$3.49, based on SOP

• We retain our ADD call and SOP-based target price.
• Consistent performance of its India business is a key catalyst.
• Litigation noise is a key risk.

LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-10-01

SGX Stock Analyst Report ADD Maintain ADD 3.490 Same 3.490