Sembcorp Industries - UOB Kay Hian 2016-08-03: 2Q16 Earnings Story From India Pushed Out To 2018

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SEMBCORP INDUSTRIES LTD U96.SI 

Sembcorp Industries (SCI SP) - 2Q16: Earnings Story From India Pushed Out To 2018

• Core 1H16 net earnings of S$245.1m (-47% yoy) was barely within expectations. 
• Utilities earnings were weaker than expected, led by a 21% decline from Singapore. 
• India’s growth story is starting to become a 2018 one, as delays in PPA commencement for its second plant SGPL likely result in further postponements. We expect full plant start-up to be in early-17, vs management’s guidance of end-16. 
• Lower earnings forecasts by 2-5% as we build in lower earnings for Singapore and India. 
• Maintain BUY. Target price: S$3.35.

RESULTS

1H16 core net profit of S$245.1m just barely within expectations. 

• Sembcorp Industries (SCI) reported headline net profit of S$86.5m (-61% yoy) for 2Q16 and S$193.5m (-47% yoy) for 1H16. 
• The half-year excluded several one-off items, including an S$8.3m intangible write-off, S$3.4m gain from disposal, S$43.0m forex loss and S$8.4m change in fair value of available-for-sale assets. Excluding the one-offs, core net profit was S$245.1m, accounting for 46% of our full-year expectations and just barely within expectations. 
• Results were primarily impacted by poorer performance from its Utilities and Marine divisions.

Net loss of S$55.3m from one-offs. 

• This included: 
  1. S$8.3m intangible write-off of development rights relating to wind sites for Sembcorp Green Infra (SGI), 
  2. S$3.4m gain on disposal from final price adjustment for Sembcorp Air Products, 
  3. S$43.0m in forex losses from Sembcorp Marine (SMM) due to revaluation of assets and liabilities denominated in GBP and USD during the quarter, and 
  4. S$8.4m change in fair value of available-for-sale assets stemming primarily from SMM.

Utilities performed below expectations. 

• Utilities net profit was S$75m for 2Q16, down 14% yoy after adjusting for a one-off divestment gain in 2Q15. Singapore was weaker than expected, largely due to the Water sub-segment plunging 50% yoy owing to closure of a customer facility. 
• The continued weakness in Singapore Energy (-9% yoy) was as expected, led by weaker spark spreads. 
• Declines in the Rest of Asia, UK & The Americas were due to contributions from divested businesses in the prior period.

India performed poorly as expected. 

• India reported a small net profit of S$4m for 2Q16, as expected due to Thermal Powertech Corporation India (TPCIL) undergoing extended maintenance during the quarter. Plant load factor for 2Q16 was 69%. Also included within the earnings was the S$8.3m intangible write-off from SGI. However, after adjusting for an S$8m-9m gain from liquidated damage owing to vendor delays, India reported a weak net profit of ~S$5m.

Urban development earnings down 48%. 

• Earnings for this segment was weaker due to timing issues, and also due to higher recognition in the prior period from its Nanjing Eco Hi- tech Island project.

Interim dividend of 4 S cents. 

• This was down from 5 S cents in the prior period.

STOCK IMPACT

Singapore utilities earnings to remain weak. 

• We expect the Singapore utilities business segment to remain weak even beyond 2018. Reserve margin is estimated at 95%, and with yoy declines in peak demand starting to show, a near-term recovery looks unlikely. That said, USEP prices appear to have stabilised.

TPCIL on track to deliver decent earnings for 2H16. 

• Looking beyond the wash-out that was 1H16, TPCIL should report better earnings in 2H16. However, the expected return is a more than 50% downward revision from earlier estimates. Earnings for the unit should improve significantly once refinancing of its debt is done, which lowers debt interest from 14% to 11-12%. 
• Interest expense forms 25% of total expense.

Expect further delays from Sembcorp Gayatri Power Ltd (SGPL). 

• SCI’s sister coal power plant SGPL (Unit #3 & Unit #4) in India is facing difficulties in securing its first long- term PPA. That PPA is now expected to delay commencement to Jan 18. 
• In the meantime, SCI is plugging the gap with two short-term PPAs amounting to 388MW. 
• Tariffs are slightly lower than its long-term PPA for TPCIL. SCI is guiding start-up of Aug-Sep 16 for Unit #3 and end-16 for Unit #4. Start-up of Unit #3 as per guidance is probably likely. However, with no PPA for Unit #4 and assuming spot prices persist at current levels, it seems uneconomical to start it up until a PPA is secured. Therefore, SCI may likely delay start-up of Unit #4 into early-17.

India looking to be a 2018 story. 

• India’s earnings were originally expected to strongly contribute to SCI’s earnings within 2016-17. However, teething issues and unexpected changes in the industry are marring the earnings story. 
• With further teething issues from SGPL expected in 2017, we expect stable earnings from both India plants only in 2018. This assumes no further unexpected surprises from India.

SMM to continue dragging earnings. 

• We expect poor earnings for the next 4-5 years.

EARNINGS REVISION/RISK

Reduce 2016-18 net profit forecasts by 2-5%. 

• We lower our 2016-18 net profit forecasts to S$519m (-2%), S$494m (-5%) and S$581m (-2%) respectively. The changes arise from a reduced profit forecast for the Singapore and India operations, as well as our revised profit forecast for SMM.

VALUATION/RECOMMENDATION

Maintain BUY and target price of S$3.35. 

• The earnings growth story for India remains mostly intact, marred by hiccups beyond SCI’s control. With experienced management leading the charge, earnings from India will be delivered albeit later than originally anticipated. 
• Current PE of 9.6x 2016F represents an opportunity to position for the eventual earnings growth, while still getting a decent dividend yield of 4.0%. Share price catalyst is a sooner-than-expected delivery of its earnings in India. 
• Our target price of S$3.35 assumes a blended PE of 9.6x for the utilities business, pegged to the respective geographic sector means and incorporates our valuation of S$1.27 per share for the Marine business. 
• Maintain BUY.

Foo Zhi Wei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-08-03

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