Sembcorp Industries (SCI SP) - UOB Kay Hian 2017-08-04: 2Q17 India Aside, Core Utilities Earnings See Sustainable Improvement

Sembcorp Industries (SCI SP) - UOB Kay Hian 2017-08-04: 2Q17 India Aside, Core Utilities Earnings See Sustainable Improvement SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries (SCI SP) - 2Q17 India Aside, Core Utilities Earnings See Sustainable Improvement

  • Sembcorp Industries (SCI) reported 2Q17 core net earnings of S$133.6m, within expectations. The earnings improvement stemmed from a better-than-expected performance from Singapore.
  • Urban Development land sales momentum remained strong. A turnaround in India is expected to take another 2-3 years to pan out. 
  • The strategic review remains on track for completion in 4Q17 and hints at a focus on utilities. 
  • Reduce 2017-19 earnings forecasts by 2-14%. Maintain BUY with a lower target price of S$3.57.



RESULTS


Core net profit of S$133.6m in 2Q17, within expectations. 

  • Sembcorp Industries (SCI) reported a 2Q17 headline net profit of S$55.3m, impacted by several one-offs:
    1. S$5.5m provision for a JV from Sembcorp Marine (SMM);
    2. S$35.5m forex translation losses on US dollar borrowings for SMM’s Brazil operations; and
    3. a S$33.9m one-off refinancing charge for its second thermal plant in India. 
  • Excluding these items, core net profit was at S$133.6m for 2Q17 and S$206.6m for 1H17. Earnings were within expectations, with 1H17 earnings coming in at 51% of our full-year estimate.

Utilities: Better earnings from Singapore lift core earnings to S$76.9m. 

  • The utilities division reported a headline net profit of S$43.0m (-42% yoy, -22% qoq), dragged by a S$33.9m one-off refinancing charge for SGPL. Excluding this, core net profit was at S$76.9m (+2% yoy, +39% qoq), helped by a better performance from its centralised utilities and gas business in Singapore, but marred by continued losses from India. 
  • By country: 
    1. Singapore (S$42m, net profit, +44% yoy): The earnings improvement came from better gas sales on higher HSFO prices and better centralised utilities earnings as a result of the Jurong Aromatic Corporation (JAC) plant starting up in 2Q17. Management remarked that it was possible that prior provisions made could be reversed in 2H17 once the new owner fully takes over JAC.
    2. India (S$4m loss, n.m.): SGI saw earnings of S$11m as it entered the high wind season. TPCIL’s earnings were better than expected at S$15m (+25% qoq) due to better plant load factor (PLF) performance (2Q17: 91%, 1Q17: 83%). SGPL posted a larger loss of S$29m due to weaker tariffs despite better PLF (2Q17: 78%, 1Q17: 67%).
    3. China (S$9m, net profit, -65% yoy): The absence of earnings contribution from the Yangcheng JV which ended in 2016 was the key cause of the earnings decline. The Chongqing coal power plant (PP) reported a 2Q17 loss due to higher coal prices, and a lag in power tariff adjustments.
    4. Middle East & Africa (S$19m, net profit, +20% yoy): This was helped by better performance from the Fujairah plant.
    5. UK and The Americas (S$2m, net profit, -68% yoy): Two plants in the UK were scheduled for shutdown during the period as per SCI’s guidance in 1Q17. They are expected to resume operations in 3Q17.
    6. Rest of Asia (S$16m, net profit, +202% yoy): Performance was helped by the recognition of construction income from the Myingyan project which follows accounting rules for projects with service concession arrangements under IFRIC 12.

Marine earnings down 54% on forex losses. 


Urban development: Earnings up 38% yoy on higher land sales. 

  • Earnings was at S$8.5m (+38% yoy), helped by industrial land sales in Vietnam.

Interim dividend of 3 S cents declared. 

  • This represents a reduction from 4 S cents in the prior period. Payout ratio was in-line with the historical ~30%. 
  • Management commented the reduction was a reflection of their need to balance rewarding shareholders and building up their cash reserves for the upcycle.


STOCK IMPACT


India turnaround to take a longer-than-expected time. 

  • SCI is expected to take a longer time to turn around its second thermal power plant (SGPL) in India. Management remarked their long-term stance on the project, and willingness to take losses for as long as 2-3 years to secure the requisite long-term PPA. 
  • A silver-lining is that the recent debt restructuring exercise should help reduce losses over the near- to mid-term. Some comfort could be taken that SCI’s balance sheet will not be overly stretched as the project is near cash breakeven.

Strategic review focused on utilities? 

  • No new details were revealed regarding its strategic review. SCI however, remarked it was “deep diving into its utilities business”, hinting at the review being focused on its primary utilities business and less on the marine business. 
  • The review is now halfway through, and is expected to be completed in late- 4Q17. An announcement of the review’s outcome may only be known in early-18.


EARNINGS REVISION/RISK


Earnings forecast for 2017 revised by 2%; cut 2018-19 earnings forecasts by 11- 14%. 

  • We have adjusted our earnings forecasts to incorporate the higher earnings from SMM, partially offset by tweaks our forecasts for the utilities business in 2017. 
  • For 2018- 19, we have removed our prior assumption of a long-term PPA being secured by 2018, reducing SGPL to losses through to 2019. This is reflected in a reduction in our earnings estimates for 2018-19 despite the earnings uplift from SMM. 
  • Our revised 2017-19 earnings forecasts are S$395m (-2%), S$480m (-14%) and S$532m (-11%) respectively.


VALUATION/RECOMMENDATION


Maintain BUY with a lower target price of S$3.57. 

  • Our SOTP target price falls from S$3.66 to S$3.57 on our earnings forecast revision for SCI’s India operations, and after incorporating our higher target price of S$1.80 for SMM
  • Maintain BUY as we expect utilities earnings to pan out in the long-term, with upside exposure to the resurgent marine business




Foo Zhiwei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-08-04
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.57 Down 3.660



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