Sembcorp Industries (SCI SP) - UOB Kay Hian 2017-11-03: 3Q17 Results Within Expectations; India Disappoints

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SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries (SCI SP) - 3Q17 Results Within Expectations; India Disappoints

• Sembcorp Industries (SCI)’s 3Q17 net profit of S$34m was impacted by one-off items but core profit was within expectations. Utilities earnings were largely in line although India disappointed with a continued net loss. The market will likely look beyond the weak numbers as:
  1. utilities earnings bottom out and start to turn around, and
  2. the market positions for the outcome of the strategic review. 
• We lower 2017-19 earnings by 1-5%. Maintain BUY with a revised target price of S$3.87, pegged to 2019 valuations.

RESULTS

3Q17 net profit down 38% yoy, within expectations. 

• Sembcorp Industries (SCI) reported 3Q17 headline net profit of S$34m (-38% yoy), largely on losses from SGPL and the absence of earnings contribution from assets divested in China and the UK. Excluding S$37m in net one-offs, including:
  1. S$56.3m impairment charge for Singapore assets,
  2. S$11.7m write-back of doubtful debts,
  3. forex losses and inventory write-down in the marine segment, and
  4. S$4.2m impairment of investment in an associate, 
  core net profit for 3Q17 was S$70.9m (-39% yoy). 
• Results were within expectations, with 9M17 core net profit of S$278.6m forming 73% of our 2017 estimate.

Utilities: Earnings largely in line, India disappoints. 

• Core net profit for 9M17 was S$207m after a S$14m write-back for doubtful debt from JAC which SCI included in its net profit before exceptional items of S$221m. Results were within expectations, at 77% of our 2017 estimate. India was a disappointment, with SGPL still in losses. Comments by country: 
  1. Singapore: Core net profit was S$37.4m (+11% yoy) excluding a S$14m write-back of doubtful debt from JAC. The higher earnings were attributed to higher HSFO prices and better steam and gas operations. A total impairment of S$56.3m was made for assets relating to oil boilers (S$25.8m) and investments (S$30.5m).
  2. India: SGI and TPCIL performed within expectations, with core net profit at S$14m (+0% yoy) and S$11m (+57% yoy, -27% qoq) respectively. SGPL reported a S$26m loss, comparable to that in prior quarters (see table). A corporate expense of S$1.7m was also included in the figures. The losses at SGPL were attributed to lower spark spreads and a lower-than-expected exposure to the spot market. The lower exposure was attributed to SGPL locking in several lower-priced ST PPAs just before spot prices rose. 3Q17 was also the first quarter of lower interest expense for SGPL post its refinancing exercise in 1H17.
  3. China: Core net profit fell 71% yoy to S$9.9m due to absence of contribution from the Yangcheng power plant.
  4. UK: Core net profit was S$2.3m (-82% yoy, +15% qoq) as Wilton 10 entered into an extended 4-week shutdown in 3Q17 post its 6-week maintenance in 2Q17. Wilton 11 also had teething issues although its earnings impact was negligible.

Marine: Net profit of S$1m, down 6% yoy. 

• Please refer to our note on SMM (see report: Sembcorp Marine (SMM SP) - 3Q17 Buoyant Contract Pipeline Obscuring Short-term Blips) 

Urban development: Net profit of S$8m. 

• This came on the back of higher land sales in Vietnam and Indonesia. Another 50ha of land was sold in 3Q17 (3Q16: 22ha).

STOCK IMPACT

Market positioning for strategic review. 

• While results appear weak, SCI’s utilities business is slowly bottoming out and turning around, led by its core Singapore operations. Positive signs of a recovery in India and Marine bode well too. 
• The market is likely to buy into this recovery, on top of positioning for the outcome of the strategic review which is due to be announced in end-17.

SGPL losses to narrow, albeit slower than expected. 

• The anticipated breakeven for India operations fails to materialise owing to SGPL’s lower-than-expected exposure to the rising spot electricity market. This exposure should increase progressively in the coming months as one of its short-term contracts has expired in Oct 17. 
• The higher exposure should allow SGPL to benefit from higher spot prices, which currently hover at Rs3.4/kWh. That said, a complete breakeven for SGPL is not anticipated in the near term as spot prices are currently only approaching the cash cost breakeven level.

New contracts in Singapore to provide some uplift. 

• With ExxonMobil taking over Jurong Aromatics Corporation (JAC), SCI has entered into fresh utilities service agreements. In addition, contracts for the supply of power and natural gas were signed, as well, and a service corridor contract is pending finalisation in 4Q17. 
• While we understand that the margins are not as high as previously contracted, the value of the new contracts should provide an overall uplift to Singapore earnings.

EARNINGS REVISION / RISK

• Lower earnings by 1-5%. A large part of this adjustment stems from the earnings cut we did for Sembcorp Marine (SMM), with minor tweaks to earnings for the utilities business. 
• Our revised net profit forecasts for 2017-19 are S$373m (-2%), S$450m (-5%) and S$511m (-1%) respectively.

VALUATION/RECOMMENDATION

• Maintain BUY, roll valuation to 2019. Our SOTP target price is S$3.87, pegged to 2019 valuations. This is due to our use of 2019 valuations for SMM (see report: Sembcorp Marine (SMM SP) - UOB Kay Hian 2017-11-01: 3Q17 Buoyant Contract Pipeline Obscuring Short-term Blips). The utilities business is priced at an implied 9.2x forward PE. 
• With the utilities business on the gradual mend, and the marine business positioned to secured several large orders, earnings are likely to improve. 
• The outcome of the strategic review could yield potential re-rating catalysts.

Foo Zhiwei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-11-03

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.870 Up 3.670