Sembcorp Industries - OCBC Investment 2018-02-26: Double-digit ROE In Five Years

SGinvestors.io

SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries - Double-digit ROE In Five Years

• Confirms India IPO.
• Re-positioning utilities.
• Aims for double-digit ROE in five years.

FY17 results impacted by one-off items 

• Sembcorp Industries reported net profit of S$22.8m (-84.6% y-o-y) in 4Q17, bringing full year net profit to S$230.8m (-41.6% y-o-y) vs. our estimate of S$269.9m and the street’s estimate of S$358.2m. Results were dragged by poorer performance in marine and one-off items in utilities. 
• Excluding exceptionals worth about S$120.8m in utilities, the segment saw a 25% drop in core net profit to about S$260.8m in FY17, within expectations.

Confirms India IPO; to divest some assets 

• Sembcorp Industries announced that it has initiated the process of an IPO of Sembcorp Energy India (no surprise to the market), and also plans to divest a number of peripheral utilities assets which is estimated to deliver cash proceeds of up to S$0.5b over the next two years.

Aims to achieve double-digit ROE in five years 

• What was a surprise and at the same time encouraging to us, however, was management’s commitment to achieve double-digit ROE in five years, based on underlying profit (i.e. not distorted by asset disposals). 
• In our view, there are three potential ways to achieve this:
  1. recovery of India utilities operations (more specifically SGPL), which is possible as management is seeing some tightening in the market,
  2. new order flows from marine, and
  3. greater returns from a revamped utilities business (there will be multiple energy offerings built around anchor assets). 
• An example of a new income stream is the start of a fuels trading business (asset-backed and not purely speculative), as Sembcorp Industries may be able to arbitrage between LNG and piped natural gas, being both a gas buyer and gas user (in power and steam).

Reaffirms commitment to marine 

• Looking ahead, the utilities business will focus on growing three business lines: Gas & Power, Renewables & Environment, and Merchant & Retail. 
• Sembcorp Industries has also reaffirmed its commitment to the marine business for the long term. 
• A final dividend of S$0.02/share has been proposed, bringing full year dividend to S$0.05/share. 
• We tweak our estimates and our Fair Value eases slightly from S$3.95 to S$3.84.
• (Maintain BUY)

Low Pei Han CFA OCBC Investment | http://www.iocbc.com/ 2018-02-26

OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 3.84 Down 3.950