Sembcorp Industries - CGS-CIMB 2018-05-03: Awaiting An Indian Turnaround

Sembcorp Industries - CGS-CIMB 2018-05-03: Awaiting An Indian Turnaround SEMBCORP INDUSTRIES LTD SGX: U96

Sembcorp Industries - Awaiting An Indian Turnaround

  • Sembcorp Industries' 1Q18 core net profit of S$76m (-34% y-o-y) was below expectations at 20% of our FY18F, mainly because of Sembcorp Marine’s losses and wider-than-expected losses in India. However, Sembcorp Industries remains confident that India will be profitable by end-18. Indian IPO timeline still on track (not disclosed, but we project 2H18F).
  • Singapore utilities saw some margin pressure from power segment in 1Q18 but no alarming declining trend ahead. China core profit was stronger q-o-q on seasonality.
  • Potential catalysts for the stock:
    1. Sembcorp Marine’s share price movement from order wins or surge in oil price, and
    2. successful IPO and turnaround of Indian operations.
  • ADD maintained. Our SOP-based Target Price is reduced to S$3.49, mainly to reflect Sembcorp Marine’s lower Target Price. Current valuation is not expensive with implied utilities at 6x CY19F P/E.

Waiting for India to turn around

  • Indian losses of S$16m in 1Q18 were wider than our estimate of S$5m (4Q17:- S$35m, 1Q17: -S$17m). It had 14 days of shutdown in 1Q18 (4Q17: 18 days). The effects of higher tariff in the spot market will only be felt from 3Q18F, with some major short-term contracts expiring in Sep 18 (to be re-contracted on a higher tariff). 
  • YTD, average spot market prices have risen 10% y-o-y to Rs3.50. The turnaround will also hinge on the 250MW wind power expansion by Sep 18.

Singapore not seeing alarming decline trend

  • Singapore 1Q18 net profit fell 3% y-o-y and q-o-q to S$35m amid margin pressure from the power segment. Centralised utilities and solid waste segments were stable. 
  • We expect a drop in vesting contract from 25% currently to 22.5% in Jul-Dec 18 but this may not result in earnings drop as it could be compensated by a pickup in wholesale prices. 
  • Impact of the full liberalisation of Singapore’s electricity market in 2H18F may also be neutral given the low retail contribution to its power segment – we estimate c.2%.

Stronger load in China in winter

  • With no major one-off items, China net profit of S$33m (+48% y-o-y, -12% q-o-q) was higher than our expected S$10m, thanks to higher plant load factor in its coal power plant. 
  • UK net profit rose 24% y-o-y to S$12m (-2% q-o-q) amid higher steam demand. 
  • Rest of Asia and Middle East performed in line with no major surprises. 
  • Urban development net profit shrank to S$10m (4Q17: S$29m) due to bulky land sale and timing of recognition. 
  • Management maintains its guidance that China will perform well in 2018.

Expect to see some divestments ahead

  • Other business (incl. Chiwan yard in China) incurred loss of S$0.9m, its first loss since 2008, due to weak fabrication orders. We believe this division is slated for disposal in the near term. 
  • Recall that Sembcorp Industries has set a systematic capital recycling plan, including unlocking up to S$500m of its peripherals utilities business in the next two years e.g. the divestment of its 73.4% stake in South Africa’s Sembcorp Siza Water at c.S$89m by 1H18.

Pairing down debt from India IPO

  • Ex Sembcorp Marine net debt stood at S$4.5bn as of as of 1Q18. 
  • The IPO of Sembcorp Energy India Ltd (SEIL) and repayment of its Masala bond of c.S$600m are likely to also help to pare down some of Sembcorp Industries’ debt at group level. This should see some savings in finance cost by FY19F.

Maintain Add but lower TP

  • We cut our EPS by 1-3% for FY18-20F to reflect the weaker 1Q18 performance from Sembcorp Marine and utilities India. Our Target Price is adjusted accordingly, still based on SOP. 
  • Sembcorp Industries’ share price could re-rate in 2H18F on the turnaround and IPO of its Indian operations, as well as on any sizeable order wins.

LIM Siew Khee CGS-CIMB | 2018-05-03
SGX Stock Analyst Report ADD Maintain ADD 3.49 Down 4.130