CIMB Securities 2015-08-05: Sembcorp Industries - 2Q15 Results. Negatives priced in. Upgrade to ADD.

Negatives priced in 

  • 2Q15 core profit of S$169m met our expectation but was below consensus by 15%. 
  • 1H15 core profit formed 46% of our FY15 forecast. 
  • SCI declared an interim DPS of S$0.05 (1H14: S$0.05). 
  • We cut FY15-16 EPS by 8% to reflect our recent earnings cut in SMM. 
  • Our SOP-based target price is also reduced (from S$4.30 to S$4.02), on a lower target price for SMM. 
  • The recent sell-down could be overly done as the implied CY16 P/E for Utilities of 5.7x is below the historical average of 7x. 
  • We upgrade from Hold to Add as we see limited earnings downside. 
  • We assume 40% earnings reduction for Singapore power from 2H15 and zero profit for TPCIL in FY15. 
  • Potential catalysts are stronger Singapore power prices and there is higher profit from TPCIL 1. 
  • The unit was operating at more than 90% load factor in Jun/Jul, suggesting that the teething phase is over. 

We have assumed weaker Singapore from 2H15-FY17 

  • Singapore’s 2Q15 net profit grew by 18% qoq to S$36.4m. 
  • Power spark spread and the water segment remained stable, but solid waste was up 39% qoq as contracts were renewed at higher rates in addition to more wood waste recycling. 
  • Daily pool prices in Jul spiked as high as S$530/MW due to the unplanned shut-down of certain genco(s), resulting in higher despatch by SCI. 
  • Although pool prices in Aug have dropped to c.S$100/MW, we believe the spike in Jul could help to narrow the potential losses in Singapore power in 3Q15. 
  • We have assumed a S$6m quarterly loss for Singapore power in 3Q15-4Q15 and a S$7m quarterly loss in FY16-17 to account for lower VC. 
  • Earnings upside could stem from rational market behaviour, to adjust for higher tariffs. 

India unit 1 at +90% plant load factor 

  • TPCIL recorded S$9m of losses in 2Q15, capturing upfront start-up costs for unit 2 (to start in 3Q15). 
  • SGI (previously known as Green Infra) delivered a profit of S$3.8m in 2Q15 but we expect the project to deliver c.S$6m of profit in FY15 (comparable to FY14). 
  • Wind load factor is the strongest from May-Oct which means that earnings are the strongest in 2Q-3Q. 

Limited downside 

  • Its share price is beaten down by c.30% YTD, potentially pricing in the weak Singapore power and earnings decline in SMM. 
  • Our target price incorporates a S$2.40 target price for SMM, and DCF for Utilities (WACC: 6%, LTG: 1.5%).

Analyst: LIM Siew Khee