Sembcorp Industries (SCI SP) - UOB Kay Hian 2017-05-04: 1Q17 Poor Marine Performance, Utilities Track Expectations

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SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries (SCI SP) - 1Q17 Poor Marine Performance, Utilities Track Expectations

• SCI reported 1Q17 core net profit of S$73m, below expectations, on the loss from its marine division. Utilities’ earnings were down 27% yoy, tracking our expectations.
• SCI is undergoing a strategic review of its businesses, with all options on the table.
• The outcome of the review is not expected until 3Q/4Q17. We reduce earnings forecasts by 2-4%. 
• Maintain BUY with a lower target price of S$3.66 after incorporating our lower valuation for Sembcorp Marine.

RESULTS

Core net profit of S$73m, below expectations. 

• Sembcorp Industries (SCI) reported headline net profit of S$119m (+11% yoy) for 1Q17. 
• Excluding one-offs including disposal gains from Cosco Shipyard Group (S$46.8m) and net write-back of doubtful debts relating to its China utilities operations (S$6.2m), core net profit was S$73m (-30% yoy). This represents 17% of our prior full-year estimate of S$423m, below expectations. 
• Results were lower largely due to the unexpected loss from the marine business, as well as weaker earnings from the Middle East and the UK/the Americas, partially offset by higher land sales from its associate in Nanjing, China.

Utilities net profit of S$55.3m (-27% yoy). 

• The utilities business saw weakness from China, the Middle East/Africa and UK/The Americas.
  1. Singapore: Net profit of S$34.2m (+15% yoy), helped by higher HFSO prices and largely due to better efficiencies from its centralised utilities contracts. No one-offs were reported.
  2. China: Net profit fell to S$22.1m (-14% yoy) due to absence of contribution from Yangcheng coal power plant (PP) in 1Q17, partially offset by a S$8m write-back of doubtful debts. Chongqing coal PP commenced operations in 1Q17 and broke even. On an equal comparison basis, excluding the effects of the write-back in 1Q17 and Yangcheng PP in 1Q16, core net profit for China operations was about S$14m (-10% yoy).
  3. The UK/The Americas: Net profit of S$10m (-28% yoy). Most of its assets reported minute declines that contributed to the overall S$3.8m decline. Earnings in 2Q17 are expected to drop as two plants in the UK undergo planned maintenance.
  4. Middle East/Africa: Net profit fell to S$9.5m (-23% yoy) as Oman operations were impacted by a rise in tax from 12% to 15%.
  5. Rest of Asia: Net profit up 53% yoy due mainly to recognition of construction income from the Myingyan plant under IFRIC 12 accounting rules.

India: Losses at SGPL and SGI, partially offset by earnings at TPCIL. 

• SGPL commenced operations in Feb 17, and the losses (S$26m) were to be expected. There was also a partial refinancing charge of S$5.2m separately reported for 1Q17. SGPL expects to complete the remainder of the refinancing by 2Q17, incurring a total refinancing charge similar to TPCIL’s in 4Q16. Plant load factor (PLF) for SGPL was remarked to be 60% for 1Q17 (we computed it at 67%). SGI reported a loss of S$2m as it was in low wind season.
• TPCIL reported a strong quarterly net profit of S$12m and PLF of 83% (Jan: 62%, Feb: 91%, Mar: 96%). The low PLF in January was due to 12 days of planned maintenance shutdown for Unit #1 and 6 days of downtime following a steam line problem for Unit #2. PLFs for TPCIL and SGPL for April (as of 30 April) stood at 95% and 79% respectively.

Marine: Core net loss for 1Q17. 

• Please refer to our Sembcorp Marine (SMM) note dated 28 Apr 17.

Urban development reported strong land sales of 85ha. 

• This was helped by its associate in Nanjing, which booked a 42.6ha commercial & residential plot land sale during the quarter. SCI is hopeful of making more land sales going forward.

STOCK IMPACT

Utilities tracking expectations, marine dragging earnings. 

• Aside from the surprise land sale from the urban development segment and the loss from the marine division, utilities’ earnings are largely tracking our expectations. 
• Net profit including exceptionals of S$55.3m was 22% of our 2017 estimate of S$251m. 
• Earnings from TPCIL and SGPL are in-line with our expectations for a weak 2017. 
• The marine business should remain a drag on group earnings in the near term as we expect margin compression from the delayed Kaombo project.

Strategic review ongoing, likely approval and implementation by Oct 17. 

• CEO Neil McGregor’s has undertaken a strategic review of the group as part of his on-boarding process as new CEO. 
• The strategic review will take six months, with the exercise taking three months and board review/approval of plans to take another three months. Mr McGregor was careful not to reveal much beyond stating that all options are on the table.
• The first hints of the review’s outcome are expected around 3Q17.

EARNINGS REVISION/RISK

Reduce earnings for 2017-19 by 2-4%. 

• We reduce our net profit forecasts by 2-4% for 2017-19 as we incorporate our revised earnings estimates for SMM. 
• Small tweaks have been made to the utilities earnings forecasts as we incorporate earnings contributions from the 250MW India wind power project into our earnings (+0.3-0.6% to 2017-19 utilities earnings). 
• Our new net profit forecasts are S$403m (-5%), S$559m (-2%) and S$597m (- 4%) for 2017-19 respectively.

VALUATION/RECOMMENDATION

• Maintain BUY with a lower target price of S$3.66 (from S$3.78) as we incorporate the lower target price of S$1.43 (previously S$1.61) for SMM. 
• Utilities earnings are valued at a blended 9.8x 2018F PE. SCI is a long-term utilities play that remains on track for its overseas business to deliver earnings in 2018.

Foo Zhi Wei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-04

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.66 Down 3.780