Sembcorp Industries’ profit rises 5% to S$335m in 1H11

Group earnings in-line with expectations. Sembcorp Industries’s 1H11 net profit of S$335m (+5% YoY) accounted for 47% of ours and consensus estimates. Utilities division showed strong performance: 2Q11 net profit of S$76m (+23% QoQ, +30% YoY) lifted 1H11 Utilities net profit to S$137m (+17% YoY) and was 55% of our forecast. We are positive on SCI as we like its earnings growth from the pipeline of new projects in the next three years and ex-marine valuation is attractive at 8x FY11F P/E. We maintain our FY11-12F EPS estimates but adjust our TP from S$6.40 to S$6.25 due lower TP for Sembcorp Marine and mark-to-market valuation for Gallant Venture.

Singapore Utilities performed well but Teesside remains weak. 2Q11 Utilities performance was stronger (+23% QoQ. +30% YoY) thanks to stronger earnings from Singapore (+36% YoY), China (+115% YoY) and Middle East & Africa (+115% YoY). UK operations posted a lower net profit of S$6.6m (-15% YoY) in 2Q11 as power spreads remain very weak. More than half of the UK earnings in the current quarter came from Cascal.

Projects on track to complete according to schedule: 1) The first phase of the US$1b Salalah project was completed in Jul 2011. SCI is on track to achieve full completion in April 2012. 2) Civil work for the Indian power plant project has started and completion is expected by end-2013 or early 2014. 3) Expect to award contract for Fujairah expansion by 1Q12. The expansion will increase the capacity of potable water from 100MIGD to 130 MIGD. 4) Jurong expansion is on-going and completion is expected by end-2013 or early 2014. We expect all the new projects to lift Utilities earnings by S$70-80m per annum.

Ex-marine valuation at 8x FY11F P/E. We expect stronger earnings outlook for the Utilities division to re-rate the stub. Utilities earnings were largely flat in FY07-10 but earnings will see step-up growth in the next three years from new projects.