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 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.
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.
- 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.
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.