Semb Corp Industry - Healthy 1Q09 results; target price raised on SMM upgrade

Revenues in 1Q09 were flat at S$2,147m, while net income grew 9% yoy to S$133.6m (c. 26.4% of our FY09E). Earnings growth was mainly driven by strength from its Marine division, where PATMI rose 32% yoy to S$74m. Utilities PATMI was down 16% yoy to S$51m. Together, these two divisions accounted for about 94% of the group’s 1Q09 PATMI. We view the group's long-term prospects as healthy as SCI provides a combination of stability and visibility through its utilities arm, with upside and growth through the marine division. Buy.

We have incorporated our latest forecasts and target price for SMM, which largely account for SCI’s target price increase. For Utilities, we have trimmed our estimates as FY09 could see a four-quarter impact due to the expiration of its favourable supply contracts in the UK (versus three quarters in FY08), and as the GBP continues to remain weak, which will impact earnings from its Teeside unit.

The expiration of favourable supply contracts in the UK and GBP depreciation are out of SCI’s control, and arguably, should not be the reasons for being negative on operations. The group’s core utilities business remains generally steady and its newer operations, such as Fujairah, are contributing healthily, which is reflected in the group’s 122% surge in 1Q09 PATMI (other countries) to S$10m.

The group remains in a strong position and may look at opportunities to boost its capabilities if bank funding is available and economically viable. Our SOTP yields a TP of S$4.20. Downside risks relate to the execution of its projects, unforeseen market risks in the countries in which it has invested and sustained credit problems or contract execution failures for SMM.

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