Sembcorp Industries - CIMB Research 2017-11-02: Scrubbing Mode

Sembcorp Industries - CIMB Research 2017-11-02: Scrubbing Mode SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries - Scrubbing Mode

  • Sembcorp Industries (SCI)' 3Q17’s reported net profit was below expectations due to impairment of assets and goodwill in utilities while 9M17 net profit was at 66%.
  • Core profit was also below estimates as India TPCIl’s losses did not narrow by much.
  • SGPL losses were higher than expected due to lower margin contracts and higher coal prices. 4Q17F could improve on higher spot prices.
  • Singapore was still the biggest contributor to utilities at about 60% utilities profit.
  • We factor in higher Target Price on Sembcorp Marine (SMM) to Sembcorp Industries (SCI) SOP valuations and derive a new Target Price of S$3.87. EPS adjusted by 9-10% for FY17-19. Maintain Add.

Cleaning up utilities in Singapore 

  • In Singapore, there was a c.S$52m impairment in 3Q17, which comprised S$26m for boilers and S$26m for goodwill from Tractable’s share purchased for Singapore assets in 2003. S$4m of impairment in water technology was for an overseas associate. 
  • Sembcorp Industries reversed S$14m of provision for JAC’s receivables. Sembcorp Industries also sold some boilers, a cooling tower and associated assets in Banyan to Exxon Mobil for US$113m, to be completed by 2H19F/1H2020F. 
  • We expect potential gains will be c.S$54m on book value of S$99m.

India affected by low margin contracts 

  • India reported a loss of S$2.7m in 3Q17 vs. our expected S$11m profit. Our previous forecast was premised on stronger seasonal wind capacity in SGI, stable PLF in TPCIL as well as lower interest costs in SGPL. These conditions materialised but SGPL’s 3Q17 losses of S$26m were largely unchanged vs. 2Q17’s S$29m as alternative supplies contracted earlier at lower prices were affected by higher coal prices. 
  • We expect these alternative supplies contracts to start to taper in 4Q17F.

Better from 4Q17F onwards due to higher spot prices 

  • The tightening of power supply due to a shortage in coal has resulted in higher IEX spot prices. Outages in some renewable and nuclear plants also helped spot prices rise above Rs4/kwh in Oct. SGPL could enjoy some spot price increases from 4Q17F as alternative supplies contracts taper. Management said that SPGL is operating at near-cash cost.
  • According to industry sources, SGPL is bidding for a short-term contract to supply 400MW of power to Karna-taka. This could be a rerating catalyst.

Strategic review to be concluded by Dec-17 

  • A few options are available on what can be done with Sembcorp Marine (SMM)
    • Firstly, we think privatising SMM may not extract the best value for shareholders at its current valuations (1.5x FY17 P/BV). 
    • Secondly, an outright divestment of SMM may not be easy, especially to whom is the question. 
    • Finally, dividend-in-specie distribution may be mildly positive as Sembcorp Industries can focus on being a utilities pure play and relinquish c. S$4.4bn in debts. However, this means that it will not be able to ride on the potential upcycle of oil recovery.

Maintain Add, revised TP to S$3.87 

  • Our EPS adjustments of 9-10% in FY17-19 reflect our recent earnings downgrade of SMM and lower profits from India. 
  • Securing the PPA, a clear strategy of asset monetisation as well as being a pure play in utilities could be key rerating catalysts for the stock. 
  • Downside risks include slower-than-expected recovery in India.

LIM Siew Khee CIMB Research | 2017-11-02
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 3.87 Up 3.470