Sembcorp Industries - CIMB Research 2017-05-03: What might Neil do?

Sembcorp Industries - CIMB Research 2017-05-03: What might Neil do? SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries - What might Neil do?

  • 1Q17 core net profit was slightly above our expectation, forming 28% of our FY17F, thanks to higher land sales from urban development and better TPCIL performance.
  • The new CEO, Neil McGregor, will take c.6 months to review the group, focusing on performance, sustainability and value creation. Getting India right is key, we think.
  • We do not expect a big shake-up in the core businesses in the short-term. Utilities and urban development to remain core. Marine remains an “investment”.
  • Recent share price weakness could have priced in the weak India earnings.
  • Upgrade to Add as we see upside from more cost rationalisation efforts and M&As.
  • Downside risk is failure to get a PPA by 4Q18 for SGPL. 
  • Our target price is based on SOP valuations. 

Getting India right and rationalising businesses 

  • We believe improving India’s ROIC is the new CEO’s priority. This could be followed by rationalising utilities operations with limited growth. 
  • We think Phu My 3 in Vietnam could be a candidate as tariffs are declining. 
  • UK business is possible as earnings have been patchy since the divestment of Bournemouth, as well as small water assets acquired from Cascal. 
  • Expansion into new markets is a medium-term plan. 
  • Group wise, we do not expect full divestment of SMM but possibly a partial divestment of its stake below 61%.

Urban development surpassed expectations 

  • SCI’s core net profit of S$91m (excluding gains from the divestment of Cosco) was better than our expected S$81m and consensus of S$76m due to land sale recognition in urban development. 
  • Urban development sold 42.6 hectares of commercial and residential land in Nanjing in Dec 16, chalking up net profit to S$37.2m (+36% qoq, 1Q16: S$1.2m), surpassing our FY17 forecast S$36m. 
  • We hike our net profit to S$61m for FY17, assuming S$8m of profit/quarter ahead (2015-16 average).

TPCIL and SGI steady 

  • Overall, India’s net loss of S$16m was better than our expectation of S$25m. 
  • Refinancing of interest costs paid off in TPCIL, as the plant turned in higher-than-expected profit of S$12m (4Q16: -S$4m). The project loan of S$1.4bn was refinanced on lower interest rates of 10+% from 13%. Despite the plant shutdown in Jan 17, PLF inched up qoq to 83% in 1Q17 (4Q16: 81%) with a better heat rate, suggesting that the worst could be over. 
  • SGI had a loss of S$2m (vs. our S$5m loss) on stronger winds.

SGPL loss of S$26m, in line 

  • SGPL’s S$26m loss excludes S$5.2m refinancing exercise penalty, which will balloon to c.S$30m in 2Q17 upon completion. 
  • 1Q17 blended PLF was 60+%, as unit 2 was only commissioned in end-Feb. The plant’s utilisation has picked up to c.75% in Apr/May.
  • 2H17 losses will depend on its ability to secure short-term contracts or PPA as most of the 1-year contracts (388MW) will expire in May 17. We forecast a loss of S$83m in FY17.

Upgrade to Add from Hold, target price remains at S$3.51 

  • Our FY17 EPS is adjusted up by 15% on higher urban development. 
  • Downside risk could be limited with one less problematic plant in India to tackle. 
  • Singapore’s earnings have also bottomed out as 1Q17 came in slightly above expectations (S$34m), with no one-offs. 
  • With every new CEO, SCI has seen transformation and rationalisation, which we believe could be a catalyst. 
  • Valuation for the utilities business is cheap at 0.5x P/BV vs. ROE of c.6%.

Sweating more in Singapore 

  • 1Q17 net profit of S$34m (+15% yoy, -14% qoq) was slightly above our expectations. There was no one-off in the quarter. The better performance was due to efficiency achieved in its steam and gas business. 
  • Power business remained in a loss position although vesting contracts increased to 25% from 20% in FY16. 
  • Solid waste and energy remained steady, contributing 61% of Singapore’s net profit.

China lifted by S$8m provision write-backs, Chong Qing breakeven 

  • 1Q17 net profit of S$22m (-14% yoy, -43% qoq) was above our expectations thanks to S$8m provision write-backs from assets previously sold. 
  • We were pleasantly surprised that Chong Qing was in a breakeven position despite just being newly commissioned in Jan 17. We had expected some losses on the back of higher coal costs and gestation.

The rest of Asia helped by Myanmar 

  • 1Q17 net profit of S$8.7m (+53% yoy) was largely driven by construction income for the Myanmar project.

LIM Siew Khee CIMB Research | Cezzane SEE CIMB Research | 2017-05-03
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