Sembcorp Industries - CIMB Research 2016-02-18: Recapitalisation not imminent

Sembcorp Industries - CIMB Research 2016-02-18: Recapitalisation not imminent SEMBCORP INDUSTRIES LTD U96.SI 

Sembcorp Industries - Recapitalisation not imminent 

  • FY15 net profit of S$549m was below our S$923m forecast due to SMM’s losses. Reported profit included net exceptional gain of S$370m utilities divestments. 
  • Singapore’s other utilities showed defensive demand in 4Q15. TPCIL had a small loss of S$1.5m due to cyclone effects and is set for a turnaround in 1Q16. 
  • SMM’s privatisation will only be considered if it is ‘accretive’ to shareholders or at a distressed price. There is also no need for recapitalisation due to sufficient capital. 
  • A final DPS of 6 Scts was declared, bringing total DPS to 11 Scts, or a 38% payout. 
  • Maintain Add but we lower our SOP target price on recent cuts in SMM. Catalysts could include stronger profits from India and divestments of non-core assets. 

■ No funding needs may elevate fear of recapitalisation 

  • Utilities require c.S$400m of equity capex (ex-project finance) in 2016-18, factoring in an increased stake in NCCPP (from 49% to c.70%). SCI has c.S$450m of untapped facilities from its S$2bn multi-currency debt issuance programme (S$950m used for MTN and S$600m for perpetual securities). Higher net gearing at 0.7x was due to SMM’s higher debt. This should improve slightly in FY16 as working capital eases at the yard. SCI’s corporate/project finance debt stayed unchanged at S$3.4bn qoq. 

■ Defensive ‘other utilities’ in Singapore 

  • Excluding a tax write-back of c.S$10m in Singapore, utilities FY15 net profit of S$322m was in line. 
  • Singapore’s core profit of S$37m (+22% qoq, -23% yoy) reflected steady demand for gas/steam, water and on-site solid waste. 
  • Power had a small loss (cash positive), as expected. Pool prices weakened to c.S$60/MW since 4Q15 as Hyflux’s new 411MW plant started its testing phase (start-up by 1H16). 
  • Weak spark spread could be cushioned by the revised vesting contracts cap of 25% in 2016 (previously 20%). 

■ JAC update 

  • JAC’s receiver has settled US$9m of outstanding debt and is slated to start its plant in 2Q16. Recall that SCI provided for S$16m of doubtful debts in 3Q15. 

TPCIL to be profitable in FY16, Nov 15 weather impact contained 

  • The loss of S$1.5m as a result of the cyclone in Dec 15 is not as bad as expected. SCI has submitted insurance claims worth S$5m pertaining to this. 
  • YTD, the plant has been operating at c. 80% load factor as power demand normalised. TPCIL has obtained an LOI for the second PPA of 600MW, with the final contract to be signed by end-1Q16. 
  • The first unit of NCCPP will be commissioned by May 16 and the second unit by Sep 16. 

■ Maintain Add but lower our target price 

  • We cut FY16-17 EPS by 4-5% to reflect SMM. Our SOP target is reduced accordingly (from S$3.85 to S$3.10)
  • Management’s response to privatisation speculation could ease fears of recapitalisation in the near term. 
  • Fair valuing the current market price for SMM in SCI’s SOP, the market is ascribing only S$0.90/ share for utilities, implying an undemanding 5x FY16 P/E. 
  • Longer-term catalysts could include the unlocking of value in India over the next two to three years when TPCIL and NCCPP reach a steady state of contributions.

LIM Siew Khee CIMB Securities | 2016-02-18
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 3.10 Down 3.85