Sembcorp Industries - CIMB Research 2017-08-04: We Love Singapore (again)

Sembcorp Industries - CIMB Research 2017-08-04: We Love Singapore (again) SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries - We Love Singapore (again)

  • Excluding marine and refinancing charges, Sembcorp Industries' utilities profit of S$76m was above our S$68m, thanks to stronger Singapore profit, which accounted for 56% of utilities profit.
  • Strategic review on the group is ongoing and will be concluded and communicated by CY17. A “deep dive” exercise is being carried out on its utilities business.
  • India losses narrowed with a positive swing of S$13m qoq with better PLF, but management guided that it may take 2-3 years before a long-term PPA is in.
  • An interim S$0.03 DPS was declared. We expect short-term pressure on the share price but better performance in Singapore could fill the gap in India.
  • Maintain Add with a lower target price of S$3.47, still based on SOP valuations. 1H core profit was broadly in line at 40% of FY17F as we expect a stronger 2H17.

Be patient, strategic review to be completed by CY17 

  • Investors would need to wait until 4Q17 to hear of the final outcome of SCI’s strategic review. We stick to our view that taking SMM private is not feasible. 
  • Divestment (to whom is a question) and dividend in specie to its shareholders may not be a sweet deal for main shareholder (Temasek), with SMM’s highly geared position amidst unsettled restructuring and ongoing corruption investigation in Sete Brasil. The outcome of the review could involve levelling up renewable energy investment, impairment or divestment of assets.

We are Singapore, we are Singapore… double-digit growth in FY17 

  • With no one-offs, Singapore was a beat as profit was up 45% yoy and 22% qoq to S$41.7m, thanks to higher demand for centralised utilities from Jurong Aromatics Corporation (JAC) and better optimisation of its gas portfolio. The JAC plant ramped up production after being acquired by Exxon Mobil in May 17. 
  • Recall that JAC’s contract was struck on a 20-year basis in 2010 (prior to JAC’s receivership in 2015). There is also potential for provision write-back (c.S$16m provided in 3Q15) in FY17.

Expect better 2H17 for SGPL but longer wait for PPA 

  • Management believes the demand for India’s power will only pick up in 2-3 years and is willing to stomach losses in the meantime; it may opportunistically shut down plants to reduce cost. However, 2H17 profit will see hoh improvement with the savings in interest costs post refinancing (3-4% of interests or S$40m-50m p.a.). 
  • Excluding the refinancing penalty (S$39m), SGPL’s losses widened qoq to S$29m with the expiry of Telangana’s short-term contract (Rs4/kw) in May 17 and weaker spot tariff (c.Rs2.8/kw).

Two out of three plants profitable in India 

  • TPCIL’s 2Q17 net profit was up 25% qoq and yoy to S$15m, mainly due to improved PLF of 91% (1Q17: 83%) and interest cost savings. SGI’s expanded capacity to 925MW from 788MW as at FY16 also lifted its yoy profit by 124% to S$11m. 
  • SGI will see stronger profit in 3Q17 as it is the strongest quarter seasonally. 
  • Overall, we expect India’s core loss to remain flat at S$18m (FY16: loss of S$16m), with a slight profit of S$6m p.a. in FY18-19 with the swing in interest costs from SGPL.

Maintain Add, lower target price to S$3.47 

  • Sembcorp Industries' share price may be weighed down temporarily by management’s comments on the 2-3 year wait for a PPA for SGPL. However, we appreciate the realistic and clear guidance after several quarters of uncertainty. 
  • Our EPS adjustment takes into account
    1. lower profit in SMM,
    2. higher utilities profit in Singapore and
    3. postponement of profitability in SGPL from FY19 to FY20. 
  • We maintain Add and see catalysts from better optimisation from its Singapore plants and higher-than-expected wind load factor from SGI.

Singapore dominates half of utilities profit 

  • After a four-year earnings decline, we now expect 17% yoy growth for Singapore in FY17. 
  • Although the spark spread has not recovered significantly, we believe the worst is over as grid prices bottomed out on the back of higher oil prices and completion of new planting.

Other utilities operations Middle East. 

  • Net profit was up 20% qoq and 96% yoy to S$18.6m. 2Qs and 3Qs are typically the strongest for the Middle East due to the summer months. Notably, Fujairah performed better in 2Q17, thanks to lower cost.
  • China. Net profit was down 59% qoq and 65% yoy to S$9m with the absence of an S$8m provision write-back in 1Q17 as well as higher coal prices that caused Chong Qing to be in a slight loss. However, there has been tariff adjustment in Jul and we expect to see improvement in 2H17.
  • UK/Americas. Net profit was down 80% qoq and 68% yoy to S$2m with the planned shutdown of the Wilton 10 biomass plant as well as a gas turbine. The plants were up and running in 3Q17.
  • Rest of Asia. Net profit was up 79% qoq and 200% yoy to S$16m with the IFIRC income from Myanmar (S$6m) and Bangladesh (S$5m). PM3, however, is seeing a downward trend on inverted “U” curve tariff.

Urban development waiting for wild card in China 

  • 2Q17 net profit was S$8.5m (1Q17: S$37.2m) given the lumpiness in China. Vietnam’s sales were still strong but China’s land sales were weaker, pending negotiation with policy makers to release more land quotas.

Should SCI divest SMM via dividend in specie? 

A success case study of SIA and SATS… 

  • The objective of SIA distributing its 81% stake in SATS in May 2009 was to allow the latter to grow into non-aviation businesses such as cruise handling and events catering. It was a pure non-core arm for SIA then. The distribution was priced at S$1.13/SIA. 
  • Post distribution, both stocks re-rated. SATS’s free float increased to around 56% from 19%, with Temasek holding the other c.44%. 
  • To Temasek, it was a no-loss option as SATS was still in a net cash position, which had little risk of any cash call. In addition, with Singapore’s aim to grow the IR then, visitors’ arrivals and tourism would have been a key catalyst for SATS’s earnings growth.

…will it be a success case if SCI divests SMM? 

  • It may not be a clear yes. Although SCI’s balance sheet will clearly be lightened by the c.S$4.4bn of debt from SMM, it may not be an easy process to convince its major shareholders to take on the load. 
  • We do not think Temasek will be keen to take on a majority stake in SMM until there is clarity in the corruption investigations and negotiation of contracts with Sete Brasil. 
  • We think other shareholders of SCI are more likely to sell their shares in SMM as they would have bought SMM directly if they had wanted oil and gas exposure.

LIM Siew Khee CIMB Research | 2017-08-04
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 3.47 Down 3.510