Sembcorp Industries (SCI SP) - UOB Kay Hian 2017-02-24: 4Q16: Passing Through A Resistive Node

Sembcorp Industries (SCI SP) - UOB Kay Hian 2017-02-24: 4Q16: Passing Through A Resistive Node SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries (SCI SP) - 4Q16: Passing Through A Resistive Node

  • Sembcorp Industries (SCI) reported core net profit above our expectations. 
  • Utilities’ earnings remained robust, helped by one-offs from China and the UK. India’s loss was largely due to start-up losses from its second power plant SGPL, and was a disappointment.
  • Marine earnings swung back into the black for the quarter. The losses at SGPL are troubling, and point to a 2018 earnings story. With 2017 a transition year, a long-term view is required. 
  • Maintain BUY with a higher target price of S$3.95.



RESULTS


Results above expectations. 

  • Sembcorp Industries (SCI) reported headline net profit of S$147.5m (+143% yoy) for 4Q16 and S$394.9m (-28% yoy) for 2016. 
  • Excluding several one-off items, including S$33.5m disposal gains from Yancheng China Water and the S$31.0m one-off financing charge for its India operations, core net profit was S$125.7m (+107% yoy) for 4Q16 and S$489.6m (-33% yoy) for FY16. 
  • Core net earnings were above expectations.

Utilities business remains robust. 

  • The utilities business was robust, rising 4% yoy to S$345.5m before exceptional items.
  • China reported a record profit of S$125m, owing to higher-than-expected profits from expiry of the Yangcheng cooperative JV. 
  • Singapore utilities continued to remain weak, declining 10%. 
  • India saw a loss of S$16.1m, largely due to start-up losses from its second thermal power plant in India.

Singapore continues to remain challenging. 

  • The energy business reported a 53% yoy increase in 4Q16, helped by a one-off net write-back of S$3m. 
  • Despite the higher electricity and high sulphur fuel oil (HSFO) prices, the cogen business was understood to have made a loss owing to the intense competition. The water and waste business also softened during the quarter.

Losses in India a disappointment.

  • India reported a S$37m loss in 4Q16. TPCIL reported a net profit of S$4m (after adding back S$8m in provisions), SGI saw a seasonal loss of S$6m (low wind season) while SGPL reported a S$27m loss.

TPCIL lower due to unexpected outage in Dec 16. 

  • Specifically, plant load factors (PLF) during Oct-Dec 16 were 81%, 91% and 72% respectively, averaging 81% for 4Q16. Dec 16 saw Unit #1 shut down for annual maintenance, and there was an unexpected outage for Unit #2 that lasted 12 days. 
  • The complete outage of TPCIL during that period was likely the drag on earnings.

Marine swings into the black. 

  • The marine business swung into profit of S$21m for 4Q16. Please refer to our note on SMM published on 23 Feb 17 for details.

Urban development business up 71% yoy.

  • The higher net profit was attributed to higher land sales from its Vietnam operations and its China associates and JV reporting a higher profit.
  • Final dividend of 4 S cents. This was down from 6 S cents in 2015. For 2016, SCI paid a total of 8 S cents in dividend, representing a 40% payout ratio.


STOCK IMPACT


Overseas earnings taking centre stage going forward. 

  • The Singapore utilities business continues to remain challenging, and its contribution to bottom-line will shrink as earnings from overseas take centre stage. 
  • Since 2013, that proportion has grown from 43% in 2013 to 63% in 2016. 
  • In the near term, China is expected to be the main earnings driver, as India undergoes growing pains in 2017.

SGPL losses can be cringe-worthy. 

  • SGPL was declared fully operational on 23 Feb 17, and will fully hit SCI’s bottom-line going forward. Unit #3 saw first light on 24 Nov 16, and is undergoing the requisite 1-year of teething issues (two outages to date). We expect Unit #4 to undergo the same. 
  • With no long-term PPA for either unit, SCI has been executing ST PPAs and selling to spot. That, alongside the start-up losses, resulted in a loss of S$27m for 46 days of operation in 2016. Extrapolated, it provides context why SCI is guiding performance for SGPL “to be adversely affected”. 
  • Our loss estimate for SGPL points to overall earnings for 2017 potentially coming lower than 2016.

Looking to be a 2018 story. 

  • SCI’s overseas earnings story, originally meant to start in 2016-17, is definitely pushed into 2018. This year (2017) will be a transition year, as SCI tackles with its issues in India, its new developments in Myanmar and Bangladesh, as well as a change in its senior management.
  • The marine business is expected to remain weak for the next few years.


EARNINGS REVISION/RISK

  • Adjust earnings for 2017/2018 by 1-8%. Our revised earnings for 2017 and 2018 are S$442m (-7.7%) and S$574m (-1.4%) respectively. 
  • Our 2019 earnings are introduced at S$631m.


VALUATION/RECOMMENDATION


Maintain BUY, with higher target price of S$3.95. 

  • We are taking a long-term view on this, and have pegged our valuations to 2018F earnings. 
  • Our SOTP target price S$3.95.
  • The utilities business is pegged to the geographic valuation multiples of its business, implying a blended PE of 10.6x, while we have used our target price of S$1.61 for SMM to value its marine business. For the India business, we have applied a 20% discount to our PE multiple as the business has yet to mature. 
  • SCI continues to remain a long-term utilities play, offering a reasonable dividend yield and growth upside. We recommend looking beyond the obvious hiccups this year, picking up the shares on weakness to ride the earnings story in 2018. 
  • Maintain BUY.




Foo Zhi Wei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-02-24
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.95 Up 3.200



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