Sembcorp Industries (SCI SP) - Maybank Kim Eng 2016-10-28: Keeping Watch on India

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SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries (SCI SP) - Keeping Watch on India

Utilities met expectations, but dragged by Marine 

• 3Q16 PATMI of SGD53.9m (-56% YoY, -38% QoQ) missed due to Sembcorp Marine’s (SMM SP, SELL, TP SGD1.00) losses, but the Utilities segment met our expectations as India’s TPCIL finally started to deliver, as highlighted in our last report. 9M16 PATMI of SGD247.4m (-49% YoY) formed 53% of both our and consensus FY16E. 
• We cut FY16-18E profit by 6-23%, mainly for SMM’s earnings adjustments. 
• Maintain HOLD and SOTP-TP of SGD2.40.
• We think the stock price has priced in most of SMM’s downside, but rerating still hinges highly on India’s performance.

India’s TPCIL delivered in 3Q16 

• India’s TPCIL power plant recorded 9M16 net profit of SGD7m. This suggests that the bulk of its profits were earned in 3Q16 as it just about broke even in 1H16. TPCIL now has 86% of capacity under long-term power purchase agreements (PPA) and we expect contribution to steadily improve. 
• Sembcorp Green Infra registered 9M16 net profit of SGD19m, also from better 3Q16 performance due to seasonally high wind load.
• However its second India coal-fired power plant, Sembcorp Gayatri Power (SGPL), lost SGD4m due to start-up expenses.

SGPL met with start-up issues, no long-term PPA yet 

• SGPL suffered technical issues during start up for its first unit in 3Q16 and had to be shut down. Commercial operation dates for its 2 x 660MW units are now deferred by a quarter to 4Q16 and 1Q17, respectively. It still has not secured any long-term PPAs, but has added another 550MW of short-term contracts, bringing short-term PPAs to 938MW. 
• Inability to secure long-term PPAs could drag India down as we believe its short-term PPAs are unlikely to be profitable given the lower tariffs.

SGPL could be the swing factor 

• Our negative view on SMM is already factored into our valuations. 
• India will be SCI’s key source of earnings growth over FY17-18E as we think that material contributions from other overseas projects can only be seen after FY18. But uncertainties for its long-term PPAs for India’s SGPL still remain and could be the swing factor for SCI. 
• We keep our HOLD call and remain on the watch for more positive developments.

Swing Factors

Upside

• TPCIL and SGPL in India ramp up and turn profitable.
• Spark spread in Singapore’s power market stabilises or reverses its downtrend.
• SMM reverses its stock-price slide on any oil-price rebound or acquisition by Temasek at premium price.

Downside

• Massive order cancellations and write-downs at SMM.
• SCI needs to rescue SMM with equity or privatisation on unfavourable terms.
• Utilities projects in India and Middle East fail to contribute as expected.
• Singapore power prices fall, further impairing margins.

Yeak Chee Keong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-10-28

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 2.400 Same 2.400