NRA Capital: Sembcorp Industries - 25 Feb 2008

Uncertainty over SCM removed

· SCI subsidiary, SembCorp Marine (SCM) announced a credible set of results last Friday. FY07 net profit was ahead of consensus expectations, with 4Q reporting a net profit of $0.8m despite a forex hit of $308m has been with another US$50.7m reported as a contingent liability.

· SCM’s performance was due to improved operating margins which rose 2.8ppt to 9.4% for 4Q07. This was partly attributed to the onset of contribution from better priced rigbuilding contracts. There was a 44% increase in rig building turnover to $2.5bn. Shiprepair also turned in
better margins as the group was able to select from higher value added projects. The group’s order book has risen to a new all-time high of $7.4bn underpinned by $5.4bn of wins in 2007 and another $403m for the year to date. We think continuing this momentum will not be a problem given oil prices are now near US$100 per barrel.

· Management has also stated that the bulk of costs would have been locked in at the time the contract is signed. The main fluid factors are labour cost and overheads, which account for some 20% of costs within the rig building division.

· More importantly, further uncertainty has been removed over SCM’s liability over the alleged unauthorized forex transactions. The group announced on February 14 that it has reduced the forex losses to $258.7m, had with 9 of the 11 banks involved in the dispute and would account $208 million as expense in the 4Q numbers.

· We maintain our Hold recommendation on the company. SCI is scheduled to announce its FY2007 results after the close of market on Feb 29. We don’t expect any negative surprises once the SCM write off has been factored in. Otherwise, the group’s other business divisions will show sustained growth while prospects remain positive despite the sluggish US economy.

DBOO PUB’s latest NEWater project

· SCI also announced last month that it has been awarded the fifth and largest NEWater project from PUB, following an open tender. The plant, under PUB’s Design-Build-Own-Operate scheme, will have an initial capacity of 15m gallons per day in 2009 and will ramp up to 50m gallons per day by 2010.

· When fully operational, it will be one of the largest water recycling plants in the world, producing 50m gallons per day of NEWater over a term of 25 years. The investment of $180m, will be funded through a mix of bank borrowings and internal sources.

· Though the project will enhance the group’s stream of long term recurrent earnings, it will not have any impact in the short term.