UOB Kay Hian 2015-08-05: Sembcorp Industries - 2Q15 Good Utilities Performance; Overseas Expansion Is On Track. Maintain BUY.

Good Utilities Performance; Overseas Expansion Is On Track 

  • 2Q15 net profit was within our expectation. 
  • Singapore utilities saw a rebound in earnings while utilities expansion in India is on track. 
  • Sembcorp Marine had earlier reported weaker-than-expected earnings for 2Q15 on fair-value losses, forex losses and associates’ losses. 
  • We lower our earnings forecasts marginally by 2-4%. 
  • Maintain BUY. Target price: S$5.00


 Results were within our expectation. 

  • Sembcorp Industries (SCI) reported a net profit of S$366m in 1H15, 48% of our 2015 forecast. 
  • The profit included an exceptional gain of S$54.6m arising from the disposal of its UK municipal water operations in 2Q15. Management had earlier flagged it in their 1Q15 results. 
  • 2Q15 net profit was S$224m. Excluding the exceptional gain, net profit would have been S$169m, which was higher than 1Q15's net profit of S$142m. 

 Singapore utilities rebounded while overseas utilities delivered higher earnings. 

  • Singapore utilities delivered a higher net profit in 2Q15 than 1Q15's. 
  • Management said some of the other power generation companies may be looking to recoup losses that they had earlier incurred in competitive bidding. 
  • Within the utilities segment, Singapore posted a 17.8% increase in net profit, from S$30.9m to S$36.4m, on higher spark spreads and better performance from the solid waste business and water business. 
  • With the exception of the rest of ASEAN, Australia & India which declined 22% yoy to S$36.4m, overseas operations reported steady profits. 
  • Net profit from China, Middle East & Africa, UK and The Americas increased by 51%, 3%, 70% and 63% yoy respectively to S$25.0m, S$13.9m, S$10.0m and S$3.1m respectively. 

 Indian power plant is on track. 

  • 2Q15 saw higher utilities earnings from overseas despite a S$9m loss at SCI’s Indian power plant. 
  • Sembcorp Green Infra (acquired in February this year) contributed S$4m profit. 
  • The first unit (660MW) of SCI’s Indian power plant JV commenced in April. It was ramped up to 90+% load by July. 
  • The first unit is carrying the common infrastructure cost of the plant. The second unit (another 660MW) is expected to commence in 3Q15. That would complete SCI’s first gross 1,320MW power plant in Andhra Pradesh in India. 
  • Management said the plant should start contributing profit by year-end. 
  • SCI’s second Indian power plant JV (gross 1,320MW) is on track for completion in 2016. 
  • SCI’s utilities expansion in India is on track. 

 Marine reported lower earnings. 

  • Sembcorp Marine (SMM) had earlier posted a net profit of S$109.2m (-17% yoy) for 2Q15 and S$215.1m (-15% yoy) for 1H15. 
  • We attribute 2Q15’s poor performance to: 
    1. mark-to-market of forex forward contracts and forex losses of S$16.9m and S$5.4m respectively, and 
    2. associates’ losses of S$2.6m due to COSCO Shipyard Group’s losses. 
  • Turnover fell 10% yoy on lower rig building revenue. This was offset by higher revenue recognition for offshore and conversion projects and higher ship repair revenue. 
  • Operating margin was 12.2%, an improvement from 1Q15’s 10.6% (4Q14: 16.1%, 3Q14: 10.0%, 2Q14: 11.5%, 1Q14: 11.1%). 
  • Excluding the losses from mark-to-market forex forward and forex totalling S$22.3m, operating margin would have been a decent 14.0%. 


 Overseas power utilities to expand 25% in 2015. 

  • Sembcorp is expected to expand its effective power generation capacity by 25%, 24% and 14% yoy in 2015-17 respectively. 
  • India dominates in SCI’s capacity expansion. Projects in the 2015 pipeline include (on a gross capacity basis) 120MW of wind assets from Green Infra and 1,320MW from the TPCIL in India, and 300MW from the Chongqing power plant (pending approval). 

 Marine contract wins shored up by Heerema contract win. 

  • SMM’s current orderbook stands at S$10.9b (1Q15: S$10.6b). It includes contract wins ytd of S$1.35b, the largest of which is the engineering and construction contract for the DP3 new semi-submersible crane vessel for Heerema Offshore Services. 
  • We maintain our contract win forecasts for 2015-17 at S$2.5b, S$3.5b and S$5.0b respectively. 
  • The drillship project for Brazil is mired in uncertainty. 
  • SMM is exploring various options with Sete Brasil for a solution. 
  • Overall, the entire drillship project for Brazil is still net cash flow positive. 
  • While SMM’s management has not expressed explicitly, in our view, other projects face possible delays. 
  • Projects potentially at risk include Transocean’s US$1.1b drillships, Perisai’s jackups, Seadrill’s North Atlantic Drilling semi-sub and Oro Negro’s jack-ups. 


 We tweak our earnings forecasts. 

  • We lower our 2015 and 2016 net profit forecasts by 4% and 2% respectively, factoring in a delay in the rig building for Transocean and Sete Brasil (at customers’ requests) at SMM. 
  • SCI’s key risk remains the current downturn in its marine business. 


 Target price is also tweaked marginally from S$5.10 to S$5.00, based on sum-of-theparts valuation. 

  • We factor in our marginally revised target price of S$2.91 for SMM and value SCI’s utilities business at 12x 2016F PE. 
  • Maintain BUY. 


  • Earnings contributions from the new power plants in India. 
  • On the flip side, a prolonged downturn in the oil & gas sector could be a drag.

Analyst: Nancy Wei; Foo Zhi Wei

Source: http://research.uobkayhian.com/