Sembcorp Industries - CIMB Research 2016-10-27: No major shocks

SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries - No major shocks

3Q16 net profit of S$54m (-48% yoy, -38% qoq) was a miss, taking in SMM’s share of losses in Cosco. 9M16 net profit formed 57% of our and consensus forecasts.
No major negative surprises for utilities. Its 3Q16 profit was slightly ahead of our forecasts, lifted by higher Singapore pool prices and provision write-back in China.
The low spot power prices in India could continue to stall the second long-term PPA to be signed by SGPL.
TPCIL turned profitable in 3Q16 on higher utilisation as teething issues resolved.

Maintain Hold as there are no firm catalysts for now. We would turn more bullish on
1. sustainable increase in India’s spot power prices, or
2. signing of PPA for SGPL.

Singapore’s profit (S$34m) was ahead of our expectations as cogen’s losses narrowed in 3Q16, thanks to higher pool prices as a result of the maintenance shutdown by other gencos. This is unlikely to continue in 4Q16.
Higher oil prices and HSFO also played a part in lifting the profits in the steam and gas division.
Water and on-site logistics remained stable, accounting for 56% of Singapore’s utilities profit in 3Q16.

India turned in a profit of S$18m (c.16% of Utilities profit) thanks to seasonally stronger SGI’s wind power (S$15m).
TPCIL is on track with stronger utilisation of 80% (2Q16:56%) as teething issues are resolved. It delivered a profit of S$7m in 3Q16.

Unit 1 (660MW) of SGPL started in Aug 16 but faced technical issues and has since shut down. As of Oct 16, it is still not in commercial operations (COD). Management is keeping its target of achieving COD in 4Q16. If on track, we expect a slight loss of S$6m for India, including S$15m losses from SGPL in 4Q16.
Delay in starting SGPL could swing India’s profitability. Management is trying to firm up a long-term Power Purchase Agreement and only managed to secure c.938MW of 1-yr contracts to plug the gap.

Net profit from China (S$35m) included a S$7.5m write-back of provision for doubtful debts.
Shanghai Caojing cogeneration plant remained strong. The new 1,320MW coal power plant in Chongqing (located next to a mine mouth) started commissioning ahead of schedule and will achieve COD by Nov 16. Management expects a relatively smoother start-up for this plant with less teething issues. This plant will replace the loss of income from SCI’s 25% stake in Yangcheng (c. 40% of China’s profit) from 2017.

The division incurred a loss of S$1m due to higher cost in Nanjing and delay in land sale. It sold 12 hectares of land in Chengdu and expects to recognise the profit in 4Q16.
We are keeping our profit target for urban development at S$36m (FY15:S$34m).

We believe the downside of power oversupply in Singapore is priced in but uncertainties linger in India (SGPL’s ability to secure a long-term PPA) and China (gestation of Chongqing coal power plant).
Current implied P/BV for utilities of c.0.5x (CY16F) could be fair valuing the business with a ROE of c.6-7%.
Our EPS is cut by 4-8% for FY16-18F to incorporate the recent downgrade in SMM.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2016-10-27

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