Sembcorp Industries - Headwinds From Utilities And Marine
- Sembcorp’s marine wing continues to be a drag on earnings due to lower work order volumes. Although the segment has SGD4bn worth of orders, the new orderbook replenishment is slow in coming.
- In the near term, we believe earnings from utilities to be unexciting. This is as India operations struggle to gain traction on a lack of a long-term PPA.
- With headwinds from both utilities and marine segments, we downgrade to NEUTRAL (from Buy) with lower a SGD3.20 TP (from SGD4.17, 7% upside).
SGD68m core earnings.
- Sembcorp Industries’ (Sembcorp) 1Q17 revenue came in at SGD2.1bn (+13% YoY, +6% QoQ).
- Its utilities and urban development wings recorded increases in topline contributions, which offset the lower revenue from its marine business.
- For the utilities wing, Sembcorp’s Singapore, India and rest of Asia operations registered topline rises, while China booked lower revenue on Yangcheng cooperative joint venture (JV) agreement (Yangcheng JV) expiry.
- The marine wing’s turnover came in 17% YoY lower on decreased work volume across rig building, floaters and ship repairs – only offshore platforms registered a growth in revenue.
- Reported earnings came in at SGD119m. After stripping away one-off items, core earnings came in at SGD68m, ie lower than our and consensus expectations.
Marine business lacks catalysts.
- Earnings for Sembcorp’s marine wing came in 28% lower – at SGD24m – on lower work volumes. Excluding gains from the disposal of its stake in the Cosco Shipyard Group, this segment recorded a SGD12m core loss. This business’ orderbook stands at SGD4bn (end-4Q16: SGD4.7bn), with projects across drilling and non-drilling solutions.
- YTD, this division has secured SGD75m in orderbook replenishments, coming mainly from the offshore and floating solutions sectors.
Stable earnings base from utilities.
- Sembcorp Gayatri Power Ltd (SGPL) started operations in February. However, it has yet to secure a long-term power purchase agreement (PPA), and the power plant is currently in the spot and alternative market. We expect India operations to remain subdued until a long- term PPA is reached.
- While the start of 1,320MW Chongqing power plant is positive for Sembcorp, earnings might take a while to ramp up. The expiry of the Yangcheng JV in 2016 would also adversely affect the utilities wings’ earnings.
- Competition in Singapore’s power business continues to be tough, but we expect the performance for centralised utilities, gas and solid waste management to continue to remain steady.
Downgrade to NEUTRAL (from Buy).
- The utilities and urban development wings continue to register strong contributions, supported by a hearty pipeline of new projects. However, earnings from the marine business are expected to be sluggish due to the current low demand for offshore and marine assets.
- We cut FY17F-18F earnings by 12-10% respectively as we adjust for lower revenue from its marine segment.
- We downgrade Sembcorp to NEUTRAL, as earnings in the near- to mid-term are unexciting.
- Our lower SOP-based SGD3.20 TP is arrived at as we lower contributions from the marine segment as well as its India and China utilities operations.