Sembcorp Industries - DBS Research 2015-10-30: Dragged by Marine

Sembcorp Industries - DBS Research 2015-10-30: Dragged by Marine SEMBCORP INDUSTRIES LTD U96.SI 

Sembcorp Industries - Dragged by Marine 

  • 3Q15 hit by disappointing Marine earnings 
  • Excluding provisions, Utilities was better 
  • Better marine earnings and ramp up in India power plant should drive sequential recovery 
  • Reiterate BUY; TP S$4.20 

3Q15 dragged by Marine. 

  • SCI’s PATMI slid 38% y-o-y and 45% q-o-q to S$122.3m in 3Q15, with the blame largely on the 70% plunge in Marine (Sembcorp Marine) earnings. 
  • Utilities segment was affected by a S$16m bad debt provision and widening losses from TPCIL of S$12m (vs S$9m in 2Q15), partially offset by S$18m gain on disposal of Zhumadian China Water. It is noteworthy that power spreads registered a small spike of 15-20% in 3Q15 on the back of maintenance shutdown by some power plants. But, this is expected to normalise to 1H levels from 4Q15. 

More upside ahead. 

  • Management remains hopeful to achieve its guidance of breakeven for its first Indian power plant – TPCIL – this year, implying c. S$20m profit in 4Q15. While this appears to be an ambitious target, the bottomline is that TPCIL is turning around and will contribute to profit in 4Q15. 
  • The Marine segment should also see earnings recovery in the absence of one-off items. In addition, SCI expects to conclude the divestment of its entire 40% stake in an Australian waste management company - SembSita Pacific Pte Ltd (SembSita) - to JV partner Suez Environment Asia by the end of the year, booking a sizeable gain of S$350m. 

Potential uplift to DPS. 

  • We have cut our FY15/16F recurring PATMI by 11%/8% to reflect SMM’s earnings revision and loss of income post divestment of SembSita from FY16 onwards (c. S$30m p.a.). 
  • Our target price for SCI is raised marginally to S$4.20 after rolling over our valuation to FY16, partially offset by a downgrade in SMM's TP (from S$2.48 to S$2.32). 
  • We continue to like SCI for its regional expansion in its utilities business. 
  • Valuation is undemanding at below GFC trough. We have lifted our DPS expectations from 13 Scts to 17 Scts in anticipation of the successful divestment of SembSita by end of 2015, assuming a 30% payout ratio. 
  • There could be an increase of 3 Scts to DPS if the payout ratio is maintained at 35%, raising its dividend yield from c.5% to 6%.

Pei Hwa Ho DBS Vickers | 2015-10-30
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 4.20 Up 4.00