Sembcorp Industries Ltd - UOB Kay Hian 2016-02-18: 4Q15 ~ No Privatisation Of Sembcorp Marine On The Cards

Sembcorp Industries Ltd - UOB Kay Hian 2016-02-18: 4Q15 ~ No Privatisation Of Sembcorp Marine On The Cards SEMBCORP INDUSTRIES LTD U96.SI 

Sembcorp Industries (SCI SP) 4Q15: No Privatisation Of Sembcorp Marine On The Cards 

  • Based on management’s comments, we believe a privatisation of SMM is highly unlikely. 
  • 4Q15’s net profit was below expectations because SMM booked a whopping loss provision of S$609m as well as large associates’ losses from COSCO Shipyard Group. 
  • SCI remains focused on its utilities business expansion. 
  • In view of SCI’s cheap valuations, maintain BUY and raise target price to S$3.80. 


RESULTS 


• Privatisation of SMM is highly unlikely. 

  • In response to a pointed question on rumours of privatisation of Sembcorp Marine (SMM), Sembcorp Industries’ (SCI) management answered candidly that: 
    1. whatever decision it makes, it has to be “accretive to SCI shareholders…and this is important” and, 
    2. that SCI already has “a 61% stake in SMM…and should reserve its money to grow other businesses that give a higher yield”. 
  • This is in view of an expected prolonged downturn in the marine business. 

• 4Q15 net profit down 75% to S$61m. 

  • SCI’s 4Q15 net profit was worse than expected, declining 75% yoy from S$241m to S$61m, with full-year 2015 net profit down 32% yoy from S$801m in 2014 to S$549m. This was largely due to heavy losses at SMM, which were partially offset by divestment gains in the Utilities business. 
  • Marine reported a S$328m loss, as SMM took a S$609m loss provision (as reported on Monday). 
  • Utilities posted 261% higher net profit of S$395m, boosted by net divestment gains of S$301m. 

• Marine loss of S$328m. 

  • SMM had earlier announced a 4Q15 net loss of S$537m due to a loss provision of S$609m for Sete Brasil drillship contracts and other rig contracts, as well as a S$150m loss from associate COSCO Shipyard Group (CSG). 
  • The provision was mostly for supply-chain costs, as well as doubtful debts pertaining to some of its riskier rig contracts. 

• Utilities’ net profit up 261% yoy to S$395m on divestment gains. 

  • SCI reported a net divestment gain of S$301m for 4Q15, which comprises a S$353m divestment gain from SembSita, less provisions of S$52m. 
  • Provisions were made up of S$31m of impairment from exiting the Singapore chemical feedstock business and S$21m allowance for bad debt following a divestment in its China business. 
  • Excluding divestment gains, Utilities’ earnings was actually S$94m, down 14% on two factors: 
    1. weaker Singapore earnings (- 16% yoy) on industry overcapacity and weak spark spreads, and 
    2. losses from its India power plant, TPCIL, due to floods in 4Q15. TPCIL recorded a small S$1.5m loss due to the aforementioned force majeure. 
  • Management is guiding profit for 2016. 

• Urban Development earnings up 6%. 

  • The division recorded flat 4Q15 earnings of S$16m, due to strong land sales in Vietnam, offset by lower margins and higher costs of sales. 
  • Slow sales at Nanjing Eco Hi-tech island have impacted the unit’s performance. 

• Assets available-for-sale assets suffered S$36m impairment. 

  • SCI suffered a S$36m impairment for assets available-for-sale, predominantly due to Gallant Venture. 


STOCK IMPACT 


• Singapore utilities continue to suffer from overcapacity. 

  • The Singapore power market will continue to suffer from overcapacity for at least the next three years. 
  • We estimate reserve margin at 86%, 35ppt above 2011 levels which saw peak uniform Singapore energy prices (USEP). 
  • Prices plumbed new lows in 4Q15, averaging S$62/MWh. A floor however, seems to have been found, as the first two months of 2016 saw prices average at the S$60/MWh level. 

• Overseas power projects to drive earnings. 

  • Earnings growth will be driven strongly by four major projects coming on-stream over 2016-18: 
    1. NCC Power Project (NCCPP) in India (1,320MW, 2016 COD), 
    2. Chongqing Songzao in China (1,320MW, 2017 COD), 
    3. Myingyan in Myanmar (225MW, 2018 COD), and 
    4. Sirajganj in Bangladesh (426MW, 2018 COD). 
    We estimate that these will add a total of S$192m to earnings over 2016- 2018. 

• Update on India. 

  • TPCIL has secured its second long-term PPA for 570MW with Telangana. This puts 86% of TPCIL’s capacity under long-term PPAs. 
  • We expect TPCIL to contribute an estimated S$50m/year from 2016 onwards. NCCPP remains on track for a full start-up by end-16, with Units #1 and #2 scheduled for a May 16 and Sep 16 startup respectively. 
  • SCI also plans to develop its renewable energy capabilities through Green Infra, adding 500-1,000MW of wind capacity per year. 

• Risk of further provisions at SMM to drag earnings. 

  • While SMM has made sizeable provisions for rig-building contracts at risk, none have been made for its Perisai jack-up rig contracts, which we think are at risk of being cancelled. 
  • In a continued low oil price environment, asset impairment of annexed rigs also raises the possibility of further writedowns. 
  • Potentially more loss provisions will continue to haunt SCI’s earnings in the coming quarters. 


EARNINGS REVISION/RISK 


• Increase 2016/2017 core net profit forecasts by 4-5%. 

  • We tweak our 2016/2017 net profit forecasts to S$563m (+5%)/S$590m (+4%) respectively, adjusting for divestments and a higher plant load factor (PLF) assumption for TPCIL. 
  • We introduce our 2018 earnings estimate of S$664m. 


VALUATION/RECOMMENDATION 


• Maintain BUY and raise target price from S$3.47 to S$3.80. 

  • We peg our target price to 12x PE for the Utilities business. 
  • Barring unforeseen circumstances, the India power plants are primed to drive strong earnings growth. 
  • Maintain BUY on valuation grounds.



Nancy Wei CFA UOB Kay Hian | Foo Zhi Wei UOB Kay Hian | http://research.uobkayhian.com/ 2016-02-18
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.80 Up 3.47


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