SINGAPORE (May 9): Phillip Capital is upgrading its call on Sembcorp Industries to “buy” with a lower target price of $3.83 compared to $3.86 previously due to the higher expected return from the counter’s last closing price of $3.06.

The upgrade comes even as Sembcorp’s 1Q18 net profit missed the research house’s expectations substantially, says analyst Chen Guangzhi in a Wednesday report, which was due mainly to weak performance from its marine segment.  

In view of prolonged weak profitability from Sembcorp Marine (SMM), the analyst has tweaked FY18E earnings per share (EPS) downwards to 18.9 cents from his previous estimate of 19.8 cents.

However he remains positive on Sembcorp in general as he expects a turnaround in Sembcorp’s India operation in the financial reporting seasons to come.

In particular, Chen notes drastic improvements in spot and short-term tariff average monthly prices with the average monthly price in Apr-18 up 53% y-o-y at Rs4.15/kWh ($0.083/kWh).

On his expectations of a roll-down in contracts to come under short-term PPAs, he also notes that the prevalent bid for short-term PPAs ranges from Rs4/kWh to Rs7/kWh.

“For Utilities’ segment, management expected India operation as a whole will be profitable on an annual basis, which is supported by the more than 70% of the capacity are contracted under higher-value power purchase agreements (PPAs) that management aims to secure, including short and medium terms. Moreover, both positive and negative seasonal impacts on China and India are expected to be smoothed on a full year basis,” says Chen.

“On the other hand, though oil prices continued to rally, and capex on upstream exploration and production improved gradually, the market will take a few more quarters to recover since oversupply prevails. Hence, the group will continue to be dragged by SMM’s business in next few quarters,” he adds.  

Shares in Sembcorp were up by 2 cents at $3.08, or 0.9 times FY18E book, before the midday trading break.