Sembcorp Industries - OCBC Investment 2016-08-03: Steady performance from utilities

Sembcorp Industries - OCBC Investment 2016-08-03: Steady performance from utilities SEMBCORP INDUSTRIES LTD U96.SI 

Sembcorp Industries: Steady performance from utilities

  • Recurring net profit in line.
  • 2H16 to see better TPCIL performance.
  • S$0.04/share interim dividend.

2Q16 core net profit in line

  • Sembcorp Industries (SCI) reported a 22.7% YoY fall in revenue to S$1.8b and a 61.8% drop in net profit to S$86.5m in 2Q16. 2Q15, however, was boosted by S$54.7m disposal gains from the sale of Sembcorp Bournemouth Water Investment in Apr 2015, while 2Q16 saw forex loss of S$43.0m, mainly from Sembcorp Marine’s revaluation of assets and liabilities that were denominated in GBP and USD. 
  • Stripping out one- off items, we estimate core net profit fell by about 37% YoY to S$125m in 2Q16, such that 1H16 core net profit accounted for 55% of our full year figure; hence within expectations.

Overseas utilities buttressing earnings

  • Utilities saw a 20% YoY drop in turnover to S$894.7m, but was flat QoQ; utilities net profit of S$74.6m was also similar to 1Q16’s S$75.2m. 
  • Singapore operations remained weak, and we understand that power spreads was marginally lower from 1Q16. 
  • On a YoY basis, overseas operations in India, China and the Middle East performed better, but were relatively stable on a QoQ basis.

Updates on India operations

  • Average power load factor for the TPCIL plant in India was 69%, unsurprisingly lower than 83% in 1Q16 due to the shutdown of unit 2 in the quarter as mentioned in our earlier report. As the unit is now operating well, utilization should revert to normal, barring unexpected circumstances. For TPCIL, 86% of net capacity (1,070MW) has already been contracted under two long-term PPAs. 
  • As for the Sembcorp Gayatri Power plant (SGPL) which is under construction, short-term PPAs have been secured and SCI is currently bidding for a 500MW long-term PPA with Andhra Pradesh.

Interim dividend of S$0.04/share

  • In line with our expectations, the group has declared an interim dividend of S$0.04/share (payout ratio 41%), vs. S$0.05/share in 1H15. 
  • Looking ahead, management expects 2H16 to see better contributions from TPCIL, and the SGPL plant will also be completed by end 2016. 
  • Utilities in China are expected to deliver a steady performance, and we like the long-term growth prospects of the company which has exposure to developing markets. 
  • Maintain BUY with S$3.07 fair value estimate.

Low Pei Han CFA OCBC Securities | 2016-08-03
OCBC Securities Analyst Report BUY Maintain BUY 3.07 Same 3.07