SINGAPORE (Aug 22): Sembcorp Industries’ energy business finally offered a glimpse of its potential after operations in India showed signs of a turnaround and reported its biggest quarterly profit.

For the 2Q19 ended June, Sembcorp’s energy business reported an 8% rise in net profit to $92 million, driven mainly by good performance in Southeast Asia ex-Singapore, China and India, but partially offset by losses in the UK.

Operations in India swung to a profit of $47 million in 1H19 from a loss of $58 million a year go and the positive trend expected to continue given the power market in India is recovering with current peak surplus expected to reverse by FY20 which should drive up tariffs.

On a quarterly basis, Singapore power operations saw a 44% increase in net profit to $36 million from 1Q19 due to low LNG cost while UK reversed into a net loss of $18 million in the absence of the 1Q19 peak winter availability payment of $16 million.

“We believe in the long-term growth prospects of Sembcorp’s energy arm, which has expanded its global footprint into key emerging markets – India, Bangladesh, Vietnam and Myanmar,” says DBS Group Research analyst Ho Pei Hwa in an Aug 16 report with India expected to remain a key growth driver, accounting for 15-20% of earnings.

To recap, Sembcorp reported 2Q19 earnings of $98 million, 20% higher than the earnings of $82 million in 2Q18 a year ago. Basic earnings per share rose 26% to 4.98 cents from 3.94 cents. And although 2Q19 revenues fell 29% to $2.37 billion from a year ago, profit from overall operations rose 21% to $232 million.

See: Sembcorp reports 20% rise in 2Q earnings to $98 mil on improved energy business

Meanwhile, Sembcorp’s Urban business reported a 69% fall in net profit to $11 million in 2Q19, largely from Vietnam industrial land sales. However, momentum is expected to pick up as the property market continues to improve in China where a net orderbook of 504ha would be recognised as land sales over the next two to three years.

As expected, Sembcorp’s Marine business remained in the red although net losses narrowed 82% to $6 million from a loss of $34 million a year ago mainly due to continued lower overall business volume although this was offset by margin recognition from newly secured production floater projects and the delivery of a rig.

Looking ahead, SembMarine still expects sequentially higher losses in 2H19 with full-year losses projected to be similar in range to last year’s losses. This is  due to lower activity level due to low contract wins in the prior quarters.

Nevertheless, analysts like Ho of DBS still believes there exist the possibility of potential merger between Keppel’s offshore & marine arm and SembMarine in view of heightened competition in the sector.

“We believe a spin-off of its marine arm could re-rate Sembcorp’s undervalued utilities business that is being overshadowed by the cyclical marine business,” says Ho, adding that a spin-off of its marine arm could re-rate its undervalued utilities business which is being overshadowed by the cyclical marine business.

DBS is maintaining Sembcorp at “buy” with a lower target price of $3.20 or 0.8 times book value, based on the sum of its parts with a 10% conglomerate discount to the RNAV.

On the other hand, UOB Kay Hian is valuing Sembcorp at “hold” with an entry price of $2.10 and a target price of $2.34, also based on a sum-of-the-parts valuation.

While Sembcorp appears inexpensive, trading at trough valuation of 0.6 times book value or 1 standard deviation below its 10-year average of 1.0 times book, UOB believes the ongoing Brazilian-corruption investigation linked to SembMarine remains an overhang for the stock.

As at 2.51pm, shares in Sembcorp are trading 3 cents lower at $2.23.