Sembcorp Industries - OCBC Investment 2016-05-05: Overseas utilities growth on track

Sembcorp Industries - OCBC Investment 2016-05-05: Overseas utilities growth on track SEMBCORP INDUSTRIES LTD U96.SI 

Sembcorp Industries: Overseas utilities growth on track 

  • Decent 1Q16 results 
  • Overseas utilities bolstering earnings 
  • Stock has retreated since earlier run up 

1Q16 results within expectations; below street’s 

  • Sembcorp Industries (SCI) reported an 18.9% YoY fall in revenue to S$1.9b and a 24.7% drop in net profit to S$107.0m in 1Q16, such that net profit accounted for 22.1% and 23.8% of our full year total and core net profit estimates, respectively. 
  • 1Q16 net profit, however, accounted for 19.5% of Bloomberg’s FY16 earnings consensus, and is likely below the street’s expectations. 

Overseas utilities supporting earnings 

  • Utilities saw a 7% YoY drop in turnover to S$895m, mainly due to lower high sulphur fuel oil (HSFO) prices in Singapore, but this was partially mitigated by higher contribution from India. 
  • In terms of net profit, the segment registered a 1% rise to S$75.2m in the quarter, driven by overseas operations (more specifically China and the Middle East). 
  • The Singapore power business, however, continued to be impacted by competitive spark spreads. 

TPCIL plant unit 2 undergoing repair and maintenance 

  • The TPCIL plant in India had “a small profit” in 1Q16, which was in line with earlier guidance. 
  • We also understand that unit 2 of the plant has been down for about a month since early Apr due to a technical fault, and the group decided to take the opportunity to perform some repair and maintenance that was originally scheduled in the later part of this year. Management expects the unit to be up and running in the second half of this month. 

Stock has retreated 14% since the earlier 36% run up 

  • Looking ahead, the group’s overseas growth strategy for its utilities business is still on track, but downside risk from the marine business remains. 
  • We update our sum-of-parts valuation for the stock and roll forward our valuations for the utilities segment to blended FY16/17 earnings, and our fair value estimate slips slightly from S$3.21 to S$3.07. 
  • After a 36% run up in share price to a high of $3.19 in early Mar, the stock has lost about 14% of its value ever since. 
  • At current levels, we see an upside potential of about 14%, and maintain our BUY rating on SCI.

Low Pei Han CFA OCBC Securities | 2016-05-05
OCBC Securities Analyst Report BUY Maintain BUY 3.07 Down 3.21