Sembcorp Industries (SCI SP) - UOB Kay Hian 2016-10-28: 3Q16 ~ When India Delivers, It’s Electrifying

Sembcorp Industries (SCI SP) - UOB Kay Hian 2016-10-28: 3Q16 ~ When India Delivers, It’s Electrifying SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries (SCI SP) - 3Q16 ~ When India Delivers, It’s Electrifying

  • 3Q16 earnings were within expectations despite being dragged down by poor Marine earnings. Strong contributions came from overseas Utilities business, in particular India. 
  • TPCIL recorded a strong profit despite poor utilisation for the quarter. Significant earnings potential resides in its India operations, despite operational headwinds, which we estimate at S$16m for every Rp1 increase in spot electricity price. 
  • Cut 2016 earnings by 12% on poor Marine earnings, and lower target price to S$3.05. 
  • Maintain BUY.



RESULTS


9M16 core net profit of S$362m, within expectations. 

  • Sembcorp Industries (SCI) reported headline net profit of S$54.0m (-56% yoy) for 3Q16 and S$247m (-49% yoy) for 9M16. 
  • Included within 3Q16 results was S$63.1m of one-off net losses, most notably S$50.1m in impairments of available-for-sale financial assets (Gallant Venture: S$46.2m) and S$17.8m in forex losses. 
  • Excluding the one-offs, core net profit was S$117.0m (-4% yoy) for 3Q16 and S$362.1m (-27% yoy) for 9M16. 
  • Core net profit for 9M16 formed 71% of our full-year forecast, within expectations. The gap in estimate was largely due to poor earnings reported from Sembcorp Marine (SMM).

Utilities’ 3Q16 earnings S$109m up 21%. 

  • 9M16 Utilities earnings accounted for 73% of our full-year estimate of S$355m, in line with expectations. 
  • Better-than-expected performance was reported in India, China and the Middle East, which saw improvements of 20+%. 
  • China’s 3Q16 earnings included a S$7.5m provision write-back. 
  • SG earnings was up 11%, due to a low-base effect (3Q15 included allowance for doubtful debt), as well as slightly better spark spreads as some competitors underwent maintenance shutdown during the quarter.

India earnings up strongly at S$18.2m. 

  • This was compared with a loss in 3Q15. 
  • TPCIL recorded 3Q16 earnings of S$6.5m, despite a 16-day shutdown of Unit #2 at TPCIL and weak spot market prices. 
  • Sembcorp Green Infra (SGI) also delivered stronger-than-expected earnings at due to higher wind speeds and additional capacity. La Nina had the effect of higher wind speeds, as compared to El Nino which lowered wind speeds in the prior period. SGPL reported a net loss for the period.

Marine reported a loss of S$13.3m for 3Q16. 



STOCK IMPACT


TPCIL’s earnings impresses when it delivers. 

  • TPCIL’s S$6.5m earnings in 3Q16 reflect 2.5 months of operations (Unit #2 was down for 16 days or ~0.5 months in Sep), roughly working out to S$2.4m profit per month. The figures imply that TPCIL can earn S$29m annually assuming 85% plant load factor (PLF) in a bear-case scenario. This alone represents 56% of SG’s FY15 Energy earnings. 
  • We estimate that every Rp1 increase in electricity price can generate S$16m in additional profit from this level.

SGPL start-up delayed, again. 

  • We had expected this, albeit for different reasons. SGPL Unit #3 is now slated for a 4Q16 start-up, vs Aug-Sep 16 previously. Unit #4 has been pushed into early-17. Rationale for Unit #3’s delay was attributed to start-up facing technical issues. 
  • On the topic of PPAs, SGPL signed a third short-term PPA in 3Q16. The terms call for 550MW of capacity as an alternate supplier over the period Feb-Oct 17. SGPL now has 938MW of short/medium-term PPAs.

One-off financing charge of S$25m to be incurred in 4Q16. 

  • Recall that SCI intended to refinance TPCIL’s bank loans at lower interest rates of 9.5-12.0% (current: 11.5-14.0%) upon attaining mega power status. A one-off financing charge of S$25m will be charged in 4Q16 as a result, or 7% of our full-year Utilities core earnings.

Singapore earnings remain anaemic. 

  • The SG Energy business remains at a comparable level vs 3Q15. Demand for Water and On-site logistics services was lower owing to the exit of a player on Jurong Island.

SMM to continue dragging earnings. 

  • We expect poor earnings for the next 4-5 years.


EARNINGS REVISION/RISK

  • Cut 2016 earnings by 12%, 2017-18 earnings relatively unchanged. 
  • SMM’s poor 3Q16 results and its consequent revision downwards were largely the cause for our 12% earnings cut for 2016. 
  • Adjusting our earnings in India for the better-than-expected performance and the one-off financing charge, our Utilities core profit is relatively unchanged at S$324m (previous: S$325m). 
  • Our forecast for 2016-18 estimates are now S$448m (-12%), S$489m (-1%) and S$591m (+2.1%).


VALUATION/RECOMMENDATION


Maintain BUY, with lower target price of S$3.05. 

  • Our target price has been reduced from S$3.29 to S$3.05 largely due to a reduction of our forward PE multiple for SG Utilities from 10.6x to 9.0x. This is due to further fine-tuning of the multiple through exclusion of values in the boom 2007-2008 period. 
  • SCI’s utilities business in India is undergoing the requisite first year of teething issues. Despite the headwinds, the business carries significant upside earnings potential, given the volatility of spot electricity prices. 
  • SCI’s non-marine PE has fallen close to the -0.5SD level of 7.1x PE and presents an attractive buying opportunity.
  • Furthermore, investors are rewarded to wait for the eventual upside with annual dividend yields of 4-5%.




Foo Zhi Wei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-10-28
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.05 Down 3.290




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