Sembcorp Industries - CIMB Research 2015-10-29: Divestment gains to the rescue

Sembcorp Industries - CIMB Research 2015-10-29: Divestment gains to the rescue @ SG ShareInvestor SEMBCORP INDUSTRIES LTD U96.SI 

Sembcorp Industries - Divestment gains to the rescue 

  • 3Q15 core profit of S$104.6m was below our estimates and consensus due to weaker SMM earnings. 9M formed 66% of our full-year forecast. 
  • 3Q15 reported profit of S$122.3m included S$17.7m of divestment gain from the Zhumadian China Water company. 
  • Utilities Singapore’s profit would have been S$46m in 3Q15 if not for S$16m provision for doubtful debts made for Jurong Aromatics Corporation (JAC). 
  • EPS cut by 2-7% for FY15-17 to reflect our marine earnings downgrade. Our target price is raised as we roll forward to CY17, based on an SOP valuation.
  • Maintain Add, with stronger power prices in India and Singapore as potential catalysts.. TP: S$3.91

Singapore affected by JAC’s provision 

  • Utilities Singapore’s 3Q15 core net profit dropped 16% qoq to S$30.6m which included a S$16m provision for doubtful debts for JAC which is undergoing receivership. The amount provided is based on 50% of amount past due for six months. The receiver has requested SCI to continue with its supply of steam and water, suggesting that these amounts are likely to be recoverable. 

Spark spread remained stable in Singapore despite lower VCL 

  • Spark spread spiked by 15-20% qoq in Jul-Aug due to the maintenance shutdown of some gencos. This caused the power segment to deliver a c.S$4m profit in 3Q15 vs. a loss of S$5m/quarter in 1Q15-2Q15. 
  • Excluding the temporary spike, spark spread has stabilised in 3Q15 despite a lower vesting contract level (VCL) of 25% (30% in 2Q15). 
  • We see potential for earnings upside in FY16-17 if spark spread remains. We have factored in wider losses of S$7m-8m losses/quarter. 

Expect finalisation of more PPAs in India by end-15 

  • TPCIL registered a wider loss of S$12m in 3Q15 (S$9m in 2Q15), capturing upfront facilities costs, interests and depreciation for unit 2 that started operation in Sep 15. 
  • SGI also delivered stronger qoq earnings (2Q15: S$3.8m) with a seasonally stronger wind load factor. 
  • Both TPCIL unit 1 and 2 have been operating above 90% plant load factor since Sep 15. 
  • Management expects to finalise the second PPA of 600MW for unit 1 and the first 500MW PPA for unit 1 by Dec 15.. 

Urban development to be weaker in FY15 vs. FY14 

  • Urban development 3Q15 net profit of S$4.6m (-61% yoy and 6% qoq) missed its guidance of a stronger 2H15 due to lower land quota distributed in Nanjing. 
  • Management attributed the lower quota to a timing difference and expects normalisation to take place in FY16, with higher land sale price. 

Divestment gains may sustain dividend 

  • Including the latest divestment of SembSita Pacific Australia (gain of c.S$350m to be recognised in 4Q15), SCI should register a total EI gain of S$422m in FY15. Assuming SCI pays 25% from the EI gain, a special DPS of S$0.06 could bring total DPS to S$0.17 (S$0.11 on core EPS). This could translate into a yield of 4.7%. 
  • Our forecasts have excluded the SembSita S$350m gain and potential for a special dividend.

LIM Siew Khee CIMB Securities | 2015-10-29
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 3.91 Up 3.86