Sembcorp Industries - CIMB Research 2016-05-05: Focus on overseas assets

Sembcorp Industries - CIMB Research 2016-05-05: Focus on overseas assets SEMBCORP INDUSTRIES LTD U96.SI 

Sembcorp Industries - Focus on overseas assets 

  • 1Q16 net profit of S$107m (US$79m) was in line at 21% of our FY16 forecast and 20% of consensus. 
  • Utilities profit was stable yoy, thanks to stronger China, Middle East and UK, but weaker qoq due to competitive spark spread in Singapore. 
  • Overseas assets account for c.60% of utilities profit. 
  • India may only start to perform from 3Q16 due to seasonality and shutdown. 
  • Maintain Add with an SOP target price of S$3.10. Catalysts could include stronger profits from overseas assets and divestments of non-core assets. 

■ Water and solid waste contribute 73% of Singapore’s profit 

  • Singapore net profit of S$29.8m (-9% yoy, -37% qoq) was affected by lower spark spread. 
  • We estimate Sembcogen net loss to have widened qoq to S$5m (4Q15: -S$2m) as 1Q16 pool prices fell to c.S$46MW (4Q15:cS$60/MW) from full capacity expansion at Hyflux’s Tuaspring power plant. 
  • Water and solid waste were steady at S$22m net profit (73% of Singapore’s profit). 
  • Gas/steam net profit of c.S$13m was c.28% weaker qoq and yoy due to lower HSFO and oil prices, which affected some gas contract margins. 

■ India seasonally weaker in 1Q 

  • India incurred net loss of S$1.3m (4Q15: -S$1.5m) with TPCIL at a small profit. 
  • PLF was more than 80% but only 500MW was backed by PPA (priced more than c.Rs3 /kWh) with Andhra Pradesh, with remaining power (c.500MW) sold in the Indian Energy Exchange at lower prices (c.Rs2.5/kWh). 
  • Coal India’s higher production for 2015-16 and seasonal lower demand caused the IEX price to dip in Jan-Feb but it rebounded since Mar. 
  • The 570MW PPA to Telangana started end-Mar 16, securing 86% of TPCIL’s net capacity. SGI achieved a small net loss from weaker wind load in 1Q. 

■ TPCIL unit 2 shutdown may affect 2Q, India still profitable in FY16 

  • We think TPCIL could see a small loss in 2Q16. 
  • PLF dipped to 50% in Apr 16 as the second turbine faced technical teething issues, bringing forward the shutdown scheduled for 2H16, which should be completed by mid-May. 
  • No penalty will be imposed as Indian power plants are evaluated annually on its minimum output (80-90%). 
  • Management keeps its guidance of India being profitable. We expect India to deliver S$39m of profit in FY16. 

■ China accounts for one-third of utilities; Middle East/UK steady 

  • China’s net profit of S$25.6m (+29% yoy, -4% qoq) accounted for 34% of utilities earnings. There was an overall improvement in Shanghai Caojing’s power and water assets. 
  • The Middle East provided steady net profit of S$12m (+43% yoy, +4% qoq) and UK/Americas with net profit of S$13.8m (+47% yoy, +50% qoq). 

■ Maintain Add and target price of S$3.10 

  • Our FY16-18 EPS is tweaked by 0.4% to reflect our recent earnings upgrade for SMM, offset by lower profit in Utilities Singapore. 
  • The market is discounting Utilities, valuing it at 0.4x CY16 P/BV (vs. ROE of 7%). This is also below regional water and power peers’ average of 1.3x with similar returns. 
  • The successful commissioning of its second Indian power plant, SGP (previously known as NCCPP) in 4Q16 could also catalyse the stock.

LIM Siew Khee CIMB Securities | 2016-05-05
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 3.10 Same 3.10