Sembcorp Industries (SCI SP) - UOB Kay Hian 2017-04-04: Refinancing SGPL For A More Positive Outcome

Sembcorp Industries (SCI SP) - UOB Kay Hian 2017-04-04: Refinancing SGPL For A More Positive Outcome SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries (SCI SP) - Refinancing SGPL For A More Positive Outcome

  • Sembcorp Industries (SCI)’s Sembcorp Gayatri Power Ltd (SGPL) is expected to refinance its debt in 2017, which would result in a one-off financing charge estimated at S$30m. 
  • SGPL’s earnings are highly sensitive to bank interest rates, with every 100ppt decrease in interest rates adding S$12m-16m to net profit. An interest rate reduction to 10-11% will be positive to SGPL. However, this is offset by higher-than-expected other costs which result in a 0-4% reduction in our 2017-19 earnings forecasts. 
  • Maintain BUY and target price of S$3.78.



ESSENTIALS 


One-off refinancing charges for SGPL in 2017. 

  • Sembcorp Gayatri Power Ltd (SGPL) is likely to refinance its debt this year. Similar to the refinancing efforts at Thermal Powertech Corporation India Ltd (TPCIL) in 2016, this is expected to bring about a oneoff financing charge estimated at S$30m this year.

Refinancing to lower interest expense on plant. 

  • The refinancing will seek to lower the interest rate on SGPL’s debt, which currently stands at 12.9-13.8%. This is slightly higher than that at TPCIL, which ranged at 11.5-14.0% before its recent refinancing in end-16.

Looking to issue fixed-rate bonds in India. 

  • In its latest annual report, Sembcorp Industries (SCI) remarked its intention to issue fixed-rate bonds in India. The debt issuance will replace some of its bank loans at TPCIL and SGPL, which are issued at floating rates. This will help mitigate its present difficulties in making effective hedges for its Indian debt.


STOCK IMPACT


Refinancing a positive step towards profitability in 2018. 

  • We estimate SGPL’s debt at Rs70.0b (S$1.5b), translating into Rs9.4b (S$197m) in interest expense every year. This represents ~28% of SGPL’s annual expenses. So a reduction will greatly help earnings. 
  • A reduction from current levels to 10-11% will be positive for SGPL in 2018 as this swings the company into profit, based on a revision to our estimates for 2018.

Every 100ppt decrease in interest rate increases earnings by S$12m-16m. 

  • Between interest expenses and debt maturity, interest expense has a positive impact on earnings, while debt maturity negatively affects it. Based on a sensitivity analysis of SGPL’s earnings, every 100ppt decrease in interest rates results in an estimated S$12m-16m increase in net profit. 
  • The negative effect from longer maturity arises from the higher interest cost as a result of a higher principal balance (less principal repayment) each year. The impact to earnings is minimal, lowering net profit by < S$1m for every three-year extension. 
  • The upside from this is the reduction in financing cash outflow on SGPL. 

Target price improves by 5-7 S cents for every 100ppt decrease in interest. 

  • As stated earlier, a change in the interest rate has a larger impact vs a change in maturity. Our sensitivity analysis of SGPL’s earnings which translates into SCI’s target price, shows a 5-7 S cent increase for every 100ppt decrease in interest rates. 
  • A change in loan duration had almost no impact to our target price.
  • The refinancing will widen the accounting losses at SGPL in 2017 owing to the one-off refinancing charge. 
  • Post the refinancing, SGPL is expected to turn profitable in 2018. This is hinged on SCI securing a long-term PPA for execution in 2018 for at least Rs4.0/kWh. 

Factoring in impact of refinancing at SGPL. 

  • We pencil in a refinancing charge of S$30m in 2017, assume an interest rate reduction to 10-11% from 2018 onwards and a bank loan extension to 24 years (12 years presently). 
  • Our net profit /(loss) forecasts for SGPL for 2017-19 stand at (S$132m), S$10m and S$12m respectively. 

Lower 2017-19 earnings forecasts by 0-4%. 

  • We lower our earnings over 2017-19 earnings forecasts to S$423m (-4.3%), S$573m (-0.2%) and S$624m (-1.1%). 
  • Despite the significant uplift in earnings expected from a lower interest rate, is offset by higher-than-expected operating and staff costs post a review of SGPL’s accounts. 


VALUATION/RECOMMENDATION

  • Maintain BUY and target price of S$3.78. 
  • We continue to take a long-term view on SCI, and this is reflected in our valuations. Our SOTP target price of S$3.78 is pegged to 2018 earnings and assumes a blended 9.8x 2018F PE for the utilities business. Respectively, we have assumed 9x for Singapore operations, 10x for China, 10x for India with a 20% discount applied and 12x for other countries. 
  • Share price could see weakness over 2017 as earnings disappoint. 
  • Ultimately, the situation in India should pan out and SCI should realise its growth story. We recommend looking beyond the hiccups this year, picking up shares on weakness to ride the earnings story in 2018. 




Foo Zhi Wei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-04-04
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.780 Same 3.780



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