Sembcorp Industries - OCBC Investment 2018-05-04: India To Turnaround This Year

Sembcorp Industries - OCBC Investment 2018-05-04: India To Turnaround  This Year SEMBCORP INDUSTRIES LTD SGX: U96

Sembcorp Industries - India To Turnaround This Year

  • Utilities did well in 1Q.
  • In for the long term.
  • Positioning for global energy transition.

1Q18 supported by utilities

  • Sembcorp Industries (SCI) delivered a 30% increase in revenue to S$2.8b but saw a 34% drop in net profit to S$76.6m in 1Q18 with the absence of a S$46.8m disposal gain in 1Q17 (divestment of 30% interest in Cosco Shipyard Group). Excluding one-off items such as these, we estimate flattish core net profit compared to a year ago, within expectations. 
  • Utilities turned in higher net profit of S$70.3m in 1Q18 compared to S$55.3m in 1Q17, aided by China’s Songzao plant, interest cost savings following the refinancing of India thermal plants last year and higher finance income from higher cash balances. 
  • Marine’s net profit was unsurprisingly low at S$1.8m in 1Q18 vs. S$22.6m in 1Q17 with the absence of the Cosco disposal gain as well as lower overall business volume which has impacted the absorption of overhead costs. 
  • As for Urban Development, the segment saw net profit of S$9.5m in 1Q18 compared to S$37.2m a year ago; this division normally sees lumpy quarterly earnings – in 1Q17 there were commercial and residential land sales from Nanjing, China, while 1Q18 saw some industrial land sales from Vietnam.

Positioning for global energy transition

  • Currently there are few long-term PPA contracts in the market for India, and Sembcorp Industries is looking to replace its expiring contracts for SGPL with some higher-value shorter-term contracts; meanwhile there are signs that medium term PPAs are starting to come to the market. 
  • Looking ahead, Utilities should deliver a better performance in 2018 underpinned by an expected turnaround to profitability for its India energy operations by the end of the year. Over the longer term, Sembcorp Industries will seek to position itself for the global energy transition in terms of a changing global fuel mix, higher demand for renewables, proliferation of distributed energy resources and declining power prices. 
  • The share of electricity as a proportion of total energy demand is also rising in part due to the electrification of the heating and transport sectors, and Sembcorp Industries is well-placed to benefit. 
  • We maintain our S$3.59 fair value estimate on the stock.

Low Pei Han CFA OCBC Investment | 2018-05-04
SGX Stock Analyst Report BUY Maintain BUY 3.590 Same 3.590