Sembcorp Industries - UOB Kay Hian 2016-05-05: 1Q16 Net Profit Of S$107m In Line; All Eyes Are On India

Sembcorp Industries (SCI SP) - UOB Kay Hian 2016-05-05: 1Q16 Net Profit Of S$107m In Line; All Eyes Are On India SEMBCORP INDUSTRIES LTD U96.SI 

Sembcorp Industries (SCI SP) 1Q16 - Net Profit Of S$107m In Line; All Eyes Are On India

  • Results were within our expectation. 
  • Utilities net profit from overseas increased 12% yoy, offsetting a 7% yoy fall in utilities net profit from Singapore. 
  • All eyes are on India, where we expect to see a net profit contribution of S$49m for 2016 despite the losses in 1Q16. 
  • While SMM still faces numerous delayed rig deliveries, our valuation has factored in a large potential loss provision of S$729m. 
  • We maintain our BUY call on SCI for its cheap valuation. Target price: S$4.00.



RESULTS


• Results were in line. 

  • 1Q16 net profit was down 25% yoy to S$107m from S$142.2m in 1Q15. The utilities segment contributed S$75.2m (+1% yoy) while the marine segment 3.50 contributed S$33.5m (-48% yoy). 
  • The net profit mix has changed drastically. The utilities segment now accounts for 70% of SCI’s net profit, up from 52% previously, while the marine segment’s share has fallen to 31% from 45% previously.

• Within utilities, overseas net profit increased by 12% yoy. 

  • This offset weaker Singapore utilities net profit of S$30m (-16% yoy) which was due to lower spark spreads as a result of intense competition. 
  • As for overseas utilities net profit, China, the Middle East & Africa, and the UK & Americas contributed higher net profits of S$26m, (+29% yoy), S$12m (+43% yoy) and S$14m (+47% yoy) respectively. 
  • Rest of ASEAN registered lower net profit of S$6m (-58% yoy) following the divestment of Sembsita in Nov 15, while closely-watched India reported a net loss of S$1m.

• India disappoints for 1Q16. 

  • Earnings from India was a disappointment, coming in at a loss of S$1.3m. 
  • TPCIL (SCI’s first India power plant) reported a smaller-than-expected profit in 1Q16, largely offset by losses from Sembcorp Green Infra (SGI). The loss in SGI was due to the low wind season, and is expected to persist until April. 
  • TPCIL’s weak earnings was due to low electricity demand (and hence prices) in the first two months of 1Q16, which resulted in a loss. However, the losses reversed into profit due to a strong surge in electricity prices and demand in March.

• Challenging times for marine. 

  • Sembcorp Marine (SMM) had earlier reported 1Q16 net profit of S$54.8m, down 48% yoy. This had the effect of dragging down SCI’s overall earnings. 
  • Details of the SMM’s results can be found in our earlier note dated 28 April.


STOCK IMPACT


• Singapore utilities earnings to remain weak. 

  • Continued overcapacity in the Singapore power market is keeping spark spreads low. With the latest capacity addition from Hyflux coming fully online, the overcapacity situation is expected to persist. 
  • A silver lining is that electricity pool prices appear to have stabilised at the S$40/MWh level since Feb 16 (see USEP price chart), pointing to a possible bottom for Singapore utilities earnings.

• TPCIL unit #2 shutdown to impact 2Q16 earnings. 

  • Unit #2 at TPCIL is currently undergoing unplanned shutdown from April to mid-May due to a technical fault. 
  • Management has brought forward its scheduled maintenance and is conducting it during this period to avoid another shutdown later. Service resumption is planned for end-May but the downtime will nonetheless impact 2Q16 earnings.

• India earnings to pick up strongly in coming quarters. 

  • We expect TPCIL and SGI to report strong profits in the coming quarters. 
  • For TPCIL, reported electricity prices from the Indian Energy Exchange have picked up strongly since March. Bearing in mind that the price pickup in March single-handedly offset two months of losses for TPCIL, we are assured of strong earnings from merchant electricity sales in the coming quarters. 
  • Furthermore, TPCIL’s second PPA of 570MW kicks in from April onwards, and with 86% of TPCIL’s generating capacity now firmly secured by long-term PPAs, earnings volatility from the merchant market is largely removed. 
  • For SGI, the onset of the high wind season in 2Q16 should result in a reversal from loss to profit in the next quarter.

• NCCPP remains on track for full start-up by end-16. 

  • While NCCPP (SCI’s second India power plant) remains on track to commence operations by end-16, start-up dates for Units #1 & #2 have been shifted slightly. The former is now expected to start up in Jun/Jul 16 (from May 16), while the latter is closer to Sep/Oct 16 (from Sep 16). 
  • The rise in stake from 49% to 88% for NCCPP will see a jump in earnings contribution, which we have incorporated into our numbers.

• SMM to continue dragging earnings. 

  • SMM’s poor earnings will remain a drag on SCI’s earnings. A sustained low oil price environment raises the risk of order cancellations, which will result in more provisions and even possibly asset impairment. 
  • We have factored a potential S$729m in impairments into our valuation of S$0.90/share for SMM.



EARNINGS REVISION/RISK


• Tweak 2016-18 net profit forecasts by 1-3%. 

  • We tweak our 2016-18 net profit forecasts to S$548m (-3%), S$583m (-1%) and S$651m (-2%) respectively. 
  • The changes arise from a reduced profit forecast for the India operations, as well as a revised profit forecast for SMM.



VALUATION/RECOMMENDATION

  • Maintain BUY, with target price tweaked marginally from S$4.05 to S$4.00. 
  • We assume a 2017F PE of 12x for the utilities business. 
  • Excluding the Marine business, SCI’s valuation falls to S$3.38 ps. 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/ 2016-05-05
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 4.00 Down 4.05


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