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’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.

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.

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).

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.

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 | http://research.itradecimb.com/ 2016-08-02

CIMB Securities SGX Stock Analyst Report HOLD Downgrade ADD 2.66 Down 3.10