Sembcorp Industries - CIMB Research 2016-08-02: Uphill battle in India

Sembcorp Industries - CIMB Research 2016-08-02: Uphill battle in India SEMBCORP INDUSTRIES LTD U96.SI 

Sembcorp Industries - Uphill battle in India

  • 2Q16 net profit of S$86m (US$64m, -49% yoy, -19% qoq) below our and consensus estimates. 1H16 net profit formed 38% of our FY16F.
  • Key variances came from marine (hit by forex and Cosco’s losses) and weaker earnings from other business (mainly Shenzhen Chiwan Sembawang and SDC).
  • Uncertainty looms for SCI India given the depressed tariffs, delayed long-term PPAs, amidst combatting sporadic operational issues at new plants.
  • Our FY16-18F EPS cut by 14-22% on lower India profits and our recent cut in SMM’s profits.
  • Our SOP-based target price cut to S$2.66. Downgrade from Add to Hold. Downside risks include failure to get long-term PPAs and plunge in spot prices in India.

Singapore lost its major water customer; power marginally weaker

  • Singapore’s profit was slightly below our expectation. 
  • Spark spread was marginally weak 50.0% (est.-S$6 to S$7/MW), in line with lower power prices. The biggest profit drop came from water segment (-33% qoq) as a key customer, Tate & Lyle, officially shut down its operations in Jurong Island on 31 Mar 16. Water and onsite waste management account for 72% of its Singapore profit. 
  • Upward surprise could come additional steam earnings as JAC resumed operation in Jun 16.

Expect TPCIL to be profitable in 2H16, wind strongest in 3Q16

  • TPCIL's shutdown in Apr-May (56% plant load factor, PLF) resulted in 2Q16 loss of S$0.9m (US$0.7m). Teething issues have since eased as PLF recovered to c.79% in Jun-Jul. We expect TPCIL to turn profitable with S$18m (US$13m) profit in 2H16, on steadier PLF. 86% of its net capacity are backed by two long-term PPAs (contracted at Rs3.7/kwh and Rs 4.15/kwh). 
  • Profit for SGI (wind asset) was seasonally stronger, with expanded capacity, and will grow 40% qoq as wind is strongest in 3Q.

Steeper gestation for SGPL with no long-term PPA

  • SCI’s 2nd India plant SGPL (1,070MW net capacity) is due to start unit 1 in mid-Aug and unit 2 in Dec. The long-awaited 500MW PPA with Andhra Pradesh could only start in 2018. It currently has two one-year contracts (of 300MW and 88MW) till May 17. Excess power supply due to coal release have reduced yoy spot prices by 33% (c.Rs2.11/kwh). 
  • The restructuring of state electricity distribution companies (discoms) could also take time and push back PPAs in India. We cut India’s FY16F profit to S$11m (from S$39m).

Other business hit by lower orders, urban development lumpy

  • Profit from other business plunged 59% qoq to S$3.7m in 2Q16 mainly due to weaker yard backlog at 32%-owned Shenzhen Chiwan Sembawang Engineering which was affected by the challenging oil & gas industry. We believe Sembcorp Design and Construction had slower defence-related orders booked. 
  • Urban Development profit were lacklustre in 1H16, forming only 20% of our FY16F. Management expects to see a pick-up in land sale in China in 2H16 and guides for a FY16 earnings comparable to FY15.

Downgrade from Add to Hold, target price drops to S$2.66

  • An interim dividend of S$0.04 was declared (c.40% payout). 
  • Our downgrade is mainly due to the delays in investment returns in India, pressured by tariff decline and potential operational hiccups. would turn positive if a long-term PPA is secured.

LIM Siew Khee CIMB Securities | 2016-08-02
CIMB Securities SGX Stock Analyst Report HOLD Downgrade ADD 2.66 Down 3.10