• 1H17 revenue and net profit were in line with our expectation.
• Singapore utilities performed better than expected but was offset by weak India and marine operations.
• We maintain our call ACCUMULATE with an unchanged TP of S$3.5, based on sum-of-the-parts method.

Positives

+ Utilities’ Singapore operation outperformed expectation. In 1H17, net profit from Singapore arrived at S$75.8mn with 29% YoY growth, taking up c.50% of total net profit excluding corporate and exceptional item in utilities segment. The good performance was due to the improvement of centralised utilities and gas divisions despite intense competition.

+ Strategic review is still on track. The management reiterated the strategic review was in progress, and it is expected to be completed by FY17.

Negatives

– Utilities’ India operation weakened. Favored by 86% of net capacity contracted under long-term power purchase agreements (PPAs), TPCIL contributed S$27mn in 1H17. However, SGPL continues to suffer from the fluctuation of short-term tariff due to the weak spot rates at present. So far, SGPL has not secured any long-term PPAs though the team has been putting efforts. In 2Q17, SGPL was subject to one-off refinancing cost of S$33.9mn.

– Marine segment continued to drag the group’s profitability. Net profit from Sembcorp Marine (SMM) decreased by 33% YoY to S$27.4mn in 1H17, due to lower profits from drilling solutions and offshore platforms. The net order book continued to shrink without substantial replenishment, and it was reported at S$6.7bn ($3.6bn from Sete Brasil drillship projects) as of Jun-17.

Outlook

Though management was positive on the long-term outlook for power demand in India, it expected a downturn of the power market in the near term. The timeframe for securing long-term PPAs for SGPL is protracted to 2 to 3 years. However, the utilities portfolio’s performance is holding up due to the steady Singapore’s operations. India remains in start-up mode. SMM is expected to be a burden to the group in the near term since there is no evident sign of recovery from the oil market. (For updates on SMM, please refer to our report on 31st-Jul: Sembcorp Marine Ltd – Longer than expected recovery).

Maintain ACCUMULATE with unchanged target price of S$3.50

We tweak up the FY17e EPS from previous 22.2 SG cents to 22.6 SG cents, due to the estimated stronger performance from utilities’ Singapore operation in 1H17. After incorporating lower target price of S$1.55 for SMM (previously S$1.58), based on sum-of-the-parts method, we maintain ACCUMULATE with an unchanged target price of S$3.5.