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Hot stock: Sembcorp, SembMarine rally despite earnings slowdown

THE rally in Sembcorp Industries on Thursday could be the heavy industries conglomerate's best argument for having a diverse portfolio of business lines.

Sembcorp shares climbed 6.7 per cent or 17 Singapore cents to trade at S$2.70 as at 12.41pm.

The move came after the company posted a 74.7 per cent drop in net profit, to S$60.8 million, for the fourth quarter ended Dec 31, 2015. For the full 2015, net profit fell 31.5 per cent to S$548.9 million.

The slowdown did not catch the market by surprise, given that Sembcorp's rigbuilding unit Sembcorp Marine (SembMarine) has been a highly visible victim of the troubles in the oil and gas industry. SembMarine fell into a net loss of S$536.9 million in the fourth quarter and a full-year net loss of S$289.7 million in the fourth quarter.

What gave the market cause for optimism in Sembcorp were the group's other businesses. Notably, chief executive Tang Kin Fei's comments about plans to invest further in the group's utilities division pressed the right buttons among analysts.

"Sembcorp's new Thermal Powertech Corporation India Ltd (TPCIL) plant has been operating at more than 85 per cent capacity since January 2016, which should take it well into profitability," RHB analyst Lee Yue Jer wrote in a report. "This should breathe new life into the hitherto moribund utilities division after two years of declining core earnings, which could now rebound."

Mr Lee has a "buy" call on Sembcorp with a target price of S$4.

Credit Suisse analysts Gerald Wong and Shih Haur Hwang had a S$3 target on Sembcorp.

"We maintain our 'outperform' rating as we believe the current share price has not captured strong utilities earnings growth prospects from start-up of India power assets," Credit Suisse wrote.

Mr Tang also reassured the market about Sembcorp's prudence when addressing speculation that SembMarine could be privatised following its recent weakness. In a briefing on the company's results, Mr Tang said any privatisation would have to be "accretive to the company shareholders". If SembMarine can operate well on its own, Sembcorp would prefer to reserve cash to grow other businesses, he said.

CIMB analyst Lim Siew Khee kept her "add" rating on Sembcorp. "Management's response to privatisation speculation could ease fears of recapitalisation in the near term," Ms Lim said.

As RHB's Mr Lee reckoned: " A privatisation now would certainly not be EPS-accretive, and we view the market speculation as simply that."

SembMarine shares have also continued to gain despite Mr Tang's comments about privatisation. The stock rose 5.2 per cent or 8.5 Singapore cents to trade at S$1.705 as at 12.41pm on Thursday, a 20 per cent increase from the previous week's closing price.

Credit Suisse noted that SembMarine management has expressed confidence that working capital requirements have peaked, which would help to control the rig-builder's gearing. But Credit Suisse analysts said SembMarine will have to avoid further order delays or cancellations in order to reduce its gearing.

"Assuming maximum fresh working capital needs of S$1 billion in 2016 based on its drilling rig orderbook of S$2 billion, all rig deliveries have to be on-schedule for net gearing to be reduced, which might be challenging as rig utilisation continues to decline," Credit Suisse wrote.