Sembcorp Industries - Outperform

Business Times - 28 Feb 2009

CIMB-GK Securities, Feb 27, Close $2.11

IN line: Q4 2008 core net profit of $128 million (-30 per cent y-o-y) was in line with our estimate and consensus. FY2008 core net profit of $534 million (-4 per cent y-o-y) was 4 per cent above our estimate.

Marine was the key profit growth driver (+32 per cent y-o-y). SCI declared a lower FY2008 dividend per share of 11 cents for a payout of 36 per cent (FY2008: 48 per cent).

Projecting 5 per cent y-o-y earnings drop for Utilities in 2009. Q4 2008 Utilities profit of $30 million (-41 per cent) was below our expected $42 million due mainly to one-offs, including prior years' business development costs in Singapore ($10 million) and accounting standards differential adjustments for Phu My 3 (US $5 million). Stripping out the one-offs, profit would have been in line. Q4 2008 UK profit of $15 million (-20 per cent q-o-q) was largely affected by the pound's depreciation, which is ongoing. We are projecting a 5 per cent y-o-y earnings contraction for Utilities in FY2009 in view of our more cautious view on the pound, lower onsite service offtake and margin pressure from customers.

Marine the key growth driver. We expect marine to contribute 60 per cent to group earnings in FY2009, driven by the execution of its $9 billion order book.

Dividend back to old days. We were not surprised by the dividend cut, given that SembMarine earlier reduced its payout from 75 per cent to 53 per cent, citing the need to preserve cash. We have adjusted SCI's dividend payout from 50 per cent to 33 per cent, in line with its historical informal guidance (one-third of earnings).

Strong balance sheet, sustainable operating cash flow. The group had a $1.5 billion net cash position. Excluding SembMarine's net cash ($1.8 billion), Utilities' net debt stood at $244 million (net gearing of less than 0.1). Despite the volatile environment and a potential earnings dip in FY09, we still see value in its Utilities business and project operating cash flow of about $200 million per annum on a sustainable basis.

Earnings estimates trimmed by one per cent for FY2009 but raised by 6 per cent for FY10 to account for lower earnings for Utilities and Industrial Parks in FY2009. Our forecasts incorporate adjusted estimates for SembMarine. We also introduce FY2011 estimates.

Maintain outperform; target price reduced to $2.46 from $2.72, still based on sum-of-the-parts valuation. Our target price takes into account the recent cut in our target price for SembMarine and the marked-to-market value of Gallant Venture.