Will Sembcorp sink as it plugs environmental offense of overseas JV?

It could make an incremental provision of up to $74.6m.

After Sembcorp industries (SCI) announced that its majority-owned overseas joint venture was embroiled in an alleged environmental offense, the firm’s move to shell out additional provisions may weigh in on its short-term performance.

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One of the company’s joint venture wastewater treatment business is facing claims in relation to an alleged discharge of off-specification wastewater, which could push the proportion of the group's potential fines and claims to amount to up to $100m. SCI has already made provisions of $25.4m in Q4 2017 relating to this claim.

“As the potential fines and claims are now higher, we believe SCI could made incremental provision of up to S$74.6m, out of prudence. This implies a ~20% reduction in our FY18 profit forecast,” Pei Hwa Ho, analyst at DBS said in a research note.

The joint venture is still in the process of seeking legal advice as it works to defend against the claims and claim amount.

Although the development is poised to negatively affect sentiment and stock performance in the near term, the impact should be short-lived, added Ho.

“We see this as an isolated case,” she adds. “Our focus on SCI remains on the recovery of its India operations and marine contract flow.”