Sembcorp Industries - OCBC Investment 2017-08-04: Cutting Interim Dividend

Sembcorp Industries - OCBC Investment 2017-08-04: Cutting Interim Dividend SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries - Cutting Interim Dividend

  • Decent core 2Q17 results.
  • Interim div cut to S$0.03/share.
  • Downgrade to HOLD.



Decent 2Q17 results; one-off refinancing costs 

  • Sembcorp Industries (SCI) registered a 23.2% YoY (+6.3% QoQ) rise in revenue to S$2.3b and a 13.1% increase in gross profit to S$326m in 2Q17. However, higher general and administrative expenses (+20.7% YoY, +29.7% QoQ) and higher finance costs (+58.1% YoY, +11.9% QoQ) led to a 36.1% YoY fall in net profit to S$55.3m in 2Q17. This brought 1H17 net profit to S$174m, which is a decent set of results considering the one-off refinancing costs incurred for the India power plant SGPL of about S$33.9m in the quarter. 
  • Utilities’ net profit was S$43.0m in 2Q17, or S$76.9m if the refinancing costs were to be excluded. This compares to S$74.6m net profit in 2Q16. 
  • Unsurprisingly, marine’s contribution to net profit was S$3.3m in 2Q17 vs. S$7.1m in 2Q16. 
  • As for urban development, net profit from the segment was S$8.5m in the quarter compared to S$6.2m a year ago.


Operational updates 

  • Currently, the SGPL power plant has yet to secure long-term PPAs and is expected to incur losses for the year. With regards to this, management mentioned that it is prepared to ride the down-cycle as it is a long-term investor who believes in the longer-term prospects of the Indian power market. 
  • In Singapore, the centralized utilities, gas and solid waste management businesses are expected to remain steady, but the power business continues to face intense competition.


Downgrade to HOLD on valuation grounds 

  • With regards to the strategic review, management remains tight-lipped, merely updating that it is halfway through the review, and expects it to be completed by 4Q17.
  • Management mentioned that the group seeks to take a prudent approach in whatever it does, but also wants to be agile and capture opportunities when the market recovers. 
  • Finally, SCI has reduced its interim dividend from S$0.04/share last year to S$0.03/share in 1H17, as it has a dividend policy of about 30% payout, and the group seeks to be prudent and conserve cash for now. 
  • We fine-tune our estimates and our fair value estimate slips slightly from S$3.48 to S$3.43. 
  • As upside to our FV is less than 10%, we downgrade our rating to HOLD.




Low Pei Han CFA OCBC Investment | http://www.ocbcresearch.com/ 2017-08-04
OCBC Investment SGX Stock Analyst Report HOLD Downgrade BUY 3.43 Down 3.480



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