Sembcorp Industries - CIMB Research 2017-02-24: Utilities and marine switching seats

SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries - Utilities and marine switching seats

4Q16 net profit of S$147m was in line with our expectations and consensus, which included c.S$18m worth of provisions and write-backs, mainly in utilities.
2017 could see a change of fortunes for utilities and marine. Utilities profit to decline by 23% on losses in SGPL India while marine grows 27% without Cosco’s losses.
SGPL’s losses are expected to widen to S$80m in FY17 based on the 938MW short-term contracts on hand, sufficient only to cover the plant’s depreciation costs.

Our EPS is cut by 11-14% for FY17-18 on higher losses in India and our latest earnings upgrade in SMM. Our TP rises to S$3.51 (SOP) on higher SMM TP.

Singapore’s profit of S$39.6m (+17% qoq) beat our expectation, helped by a S$3m provision write-back in energy and centralised utilities.
In addition, pool prices remained high in 4Q16 which resulted in strong margins in gas. Cogen continued to be in a slight loss. We believe the losses will continue in FY17 but unlikely to widen as new planting of gencos are completed.
We expect Singapore’s core earnings to remain steady in FY17.

4Q16 was strong for China as it included the last bit of dividend bump from Yang Cheng plant, which has been transferred back to its Chinese partner. The absence of Yang Cheng will result in a loss of S$60m of profit in FY17 which is unlikely to be compensated by the new Chongqing coal power plant given the rising coal prices.
We expect China earnings to drop 48% yoy assuming no major teething issues (losses) from Chongqing and Chang Zhi wastewater plant.

Total investment for SGPL is c.US$1.5bn (c.S$2bn) with depreciation at c.S$80m p.a.
Management guided that the successful dispatching of the existing 938MW short-term contracts for SGPL will cover the cash costs (operating costs and interests expense).
We widen our loss expectation for SGPL to S$80m (previously S$32m) as we now do not expect a long-term contract to kick in by 2H17. IEX spot prices remained flattish qoq at Rs2.7/kwh which makes it less attractive for any long-term PPA to be inked.

TPCIL’s average plant load factor (PLF) was 81% in 4Q16 with a core profit of S$4m.
FY16 net profit of S$2m included S$8m provisions for billing dispute and the effects of multiple shut downs. We expect TPCIL’s earnings to grow to S$36m in FY17 if PLF remains within 80-85%. TPCIL incurred S$31m of penalty to refinance its debt in 4Q16.
We expect to see similar penalty on SGPL’s loan refinancing by 1H17. SGI wind power will expand 27% yoy to 938MW in FY17, as such we forecast profit to jump to c.S$19m.

The division turned in a profit of S$27m from a loss of S$1m in 3Q16 on stronger land sales. It sold 42.6 hectares of commercial and residential land in Dec-16 and expects to recognise in 1H17. Management expects the division to achieve stronger yoy profits.

SCI declared a final DPS of S$0.04, bringing total DPS to S$0.08 or a 36% payout. The binary effect of securing a long-term PPA for SGPL could swing India’s losses to profits.
We expect utilities’ ROE to decline to 5.7% in FY17 (7.8% in FY16) before recovering to 6.5% in FY18 with the better SGPL performance. Our SOP valuation implies 0.6x CY17 utilities P/BV.
Re-rating catalysts include 1) a PPA or 2) spillover from SMM’s orders.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-02-24

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 3.51 Up 3.020