Sembcorp Industries - OCBC Investment 2017-02-24: Continues to execute well

SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries - Continues to execute well

Sembcorp Industries (SCI) reported a 16.3% YoY decline in revenue to S$2.0b and a net profit of S$147.5m in 4Q16 vs. a net profit of S$60.8m in 4Q15; recall that SMM did not make impairments in 4Q16 unlike in 4Q15.
For 2016, SCI’s revenue was 17.2% lower at S$7.9b while net profit was 28.1% lower at S$394.9m, better than our expectations.
Utilities full year turnover was 3% lower at S$4.1b, mainly due to lower high Sulphur fuel oil (HSFO) prices, partially mitigated by higher turnover from India and the Myanmar project.
Marine revenue was 29% lower at S$3.5b, while a 28% lower revenue of S$244.8m for others/corporate was mainly due to lower contribution by a subsidiary dealing in specialized construction activities.
Stripping out one-off items, utilities net profit was S$345.5m for FY16, compared to S$331.7m in FY15, driven by record profits from SCI’s China operations.

After delivering record profits in 2016, the China operations in the utilities segment is expected to remain steady although lower than 2016 due to the expiry of the Yangcheng cooperative JV agreement in 2016.
We understand that the power units in China did exceptionally well in 2016 as coal and gas prices were lower but tariffs remained healthy, resulting in a higher spread.
In India, the plant load factor for the first thermal power plant, TPCIL, was around 81% in 4Q16. The second plant, SGPL, commenced full commercial operations in Feb 2017 but has yet to secure long-term power purchase agreements. As the spot and shortterm power tariffs remain weak, its performance is expected to be adversely affected.

In Singapore, the centralised utilities, gas and solid waste management businesses are expected to remain steady. However, the power business continues to face intense competition.
Meanwhile, SCI is also in the process of trying to secure three solar rooftop projects in Singapore to provide more sources of energy to consumers.

With a higher FV estimate for SMM, we tweak our SOTP-based fair value estimate for SCI, incorporating other adjustments for the group’s unlisted entities. This results in a rise in fair value estimate from S$3.36 to S$3.69 for SCI.
Maintain BUY.

Low Pei Han CFA OCBC Investment | http://www.ocbcresearch.com/ 2017-02-24

OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 3.69 Up 3.360