SINGAPORE (May 4): CGS-CIMB Research is keeping its “add” rating on Sembcorp Industries with a lower target price of $3.49.

This came on the back of the group announcing that its 1Q18 earnings have fallen by 34% to $76.6 million, mainly due to the absence of a one-off gain, which was recorded n 1Q17.

Revenue for the quarter was 30% higher at $2.76 billion, compared to $2.12 billion last year.

During the quarter the group recorded other operating expenses of $3.29 million, compared to other operating income of $16.3 million in the previous year.

Non-operating income also dropped 97.8% to $1.05 million from $48.6 million a year ago.

See: Sembcorp's 1Q earnings down 34% to $76.6 mil on absence of one-offs

The group’s results were below the research house’s expectations, mainly due to losses and wider-than-expected losses in India. During the quarter, the group’s India operations recorded losses of $16 million, wider than the research house’s estimate of $5 million.

In a Thursday report, analyst Lim Siew Khee says, “The effects of higher tariff in the spot market will only be felt from 3Q18F, with some major short-term contracts expiring in Sept 2018 (to be re-contracted on a higher tariff).”

On the other hand, Singapore utilities saw some margin pressure from the power segment in 1Q18 but no alarming declining trend ahead, while China core profit was stronger q-o-q on seasonality.

The group’s business in China saw a net profit of $33 million, a 48% y-o-y increase that came in higher than expected, thanks to higher plant load factor in its coal power plant.

The management also maintains its guidance that China will perform well in 2018.

Elsewhere, UK and the Americas net profit was up by 24% y-o-y to $12.4 million amid higher steam demand, while the rest of Asia and Middle East performed in line with the research house’s expectations with no major surprises.

The analyst expects to see some divestments ahead as the group’s other business (including Chiwan yard in China) incurred loss of $0.9 million, its first loss since 2008, due to weak fabrication orders.

Meanwhile, the IPO of Sembcorp Energy India Ltd (SEIL) and repayment of its Masala bond of about $600 million are likely to also help to pare down some of the Sembcorp’s debt at group level. This should see some savings in finance cost by FY19F.

As at 3.35pm, shares in Sembcorp are trading 2 cents lower at $3.04 or 0.76 times FY18 book with a dividend yield of 2.52%.