Sembcorp Industries (SCI SP) - UOB Kay Hian 2018-05-04: 1Q18 Maybe This Time Is Different

Sembcorp Industries (SCI SP) - UOB Kay Hian 2018-05-04: 1q18 Maybe This Time Is Different SEMBCORP INDUSTRIES LTD SGX: U96

Sembcorp Industries (SCI SP) - 1Q18 Maybe This Time Is Different

  • Sembcorp Industries (SCI) reported 1Q18 core net profit of S$95m, representing 26%/25% of UOBKH/consensus estimates, within expectations.
  • Utilities saw an improvement in earnings led by China, but was still bogged by losses from India. There is upside risk if India delivers on the higher tariff ST PPAs, but execution remains an issue. In the meantime, spot prices are showing signs of weakness.
  • Adjust 2018-19 earnings by 1-4%. Target price raised to S$3.60.
  • Maintain HOLD. Entry price: S$2.90.


  • Sembcorp Industries (SCI) reported headline 1Q18 net profit of S$76.7m (-34% y-o-y), lower due to the absence of divestment gains seen in 1Q17. Excluding the one-offs, core net profit was S$95.4m (+45% y-o-y), reflecting the improvement in core earnings for both the Utilities and Marine business. 
  • Core results are within expectations, representing 26%/25% of UOBKH and consensus estimates.

Utilities: Higher net profit of S$70m on improved performance from China, MEA and UK/Americas. 

  • This represented a 16% y-o-y improvement from 1Q17, which has been restated for adoption of SFRS (I). 
  • The improvement was mainly driven by China, which saw the Chongqing coal mine-mouth power plant (referred to as Songzao plant) report better performance on seasonally higher demand from the winter season. 
  • Middle East and Africa (MEA) reported a better 1Q18 due to the absence of one-off provision of deferred tax charges in 1Q17. 
  • UK/Americas was better due to S$2m in power share benefits, as well as an undisclosed write-back of overdue debts. 
  • Rest of Asia was lower as the Myingyan IPP saw lower construction income as it nears COD. 
  • Singapore (SG) was remarked as stable, and the quarter saw sub-segmental disclosures removed. However, we understand that the SG Water business was slightly lower y-o-y, while SG On-Site Logistics & Solid Waste Management was higher on one-off cost savings. Excluding the one-off, we think that the latter segment was comparable on a y-o-y core basis.

India: Smaller losses; expected to be profitable by year-end. 

  • India reported a smaller loss of S$15.6m (1Q17: loss of S$16.6m). By assets, net profit (loss) for Sembcorp Energy India Limited (SEIL), Sembcorp Gayatri Power Ltd (SGPL) and Sembcorp Green Infra (SGI) was S$15m, (S$25m) and (S$7m) respectively. A small corporate income < S$1m was recorded for India in 1Q18. Sembcorp Industries remarked that they expect India to turn profitable by year end on an annual basis. 
  • SGI reported seasonal losses (low wind season). We note that the losses were also due to lower wind speeds. The remark strikes us as unusual, as it is understood that 1Q typically sees seasonally higher wind speed than 4Q, but 1Q18 saw the reverse instead. This could potentially hint at lower wind speeds in 2H18, which suggests SGI may report slightly lower profits for 2018.

Urban development: Lower net profit of S$9.6m (-74% yoy) on lower land sales.

  • Sembcorp Industries sold 42.6ha of land in 1Q18, primarily consisting of lower value Industrial & Commercial plots. This compares with the 85ha of land sold in 1Q17, of which 42.6ha comprised higher-value Commercial & Residential plots.


India could be profitable, if the winds blow in Sembcorp Industries’ favour. 

  • Losses from India primarily stem from SGPL, which is contracted on ST PPAs with low tariffs up till Sep 18. These low tariff PPAs are expected to taper off to 38% by Jun 18 as earlier flagged in our 4 April report (see: Sembcorp Industries - India Rising ~ 1Q18 PLFs Show Steady Performance At About 80%). Earnings improvement will likely come in 2H18, if SGPL can sign new ST PPAs at the higher tariff rates, currently above the critical Rs4/kWh rate as seen on India’s DEEP portal. 
  • Assuming the factors currently supporting the elevated higher tariffs (limited thermal power capacity from low coal supply and unavailability of cooling water) persist into 2H18, SGPL could hypothetically re-contract at higher levels, report lower losses and allow India to turn profitable.

Watch IEX spot prices for indications of higher tariffs in 2H18.

  • The higher ST tariff prices have been helped by rising IEX spot prices, which have risen to Rs3.5/kWh in 1Q18 (+19.8% y-o-y, -1.3% q-o-q). As we enter the seasonally lower 2Q, weekly spot prices have declined to Rs3.3/kWh. It is probably crucial to watch whether IEX spot prices will fall further and below 2017 levels, thereby lowering the incentive for DISCOMS to lock themselves into ST PPAs. 
  • If prices do indeed stay elevated above the Rs3.0/kWh level, it would give higher credence that PPAs may be signed at higher tariff rates for 2H18.


  • Adjust 2018-19 earnings by 1-4%. At the base case, we have assumed a drop-off in low tariff ST PPAs for SGPL, and IEX spot rates averaging Rs3.5/kWh in 2018 and 2019. This sees losses from SGPL shrink to ~S$70m in 2018, while net profit for TPCIL rises to ~S$50m. 
  • Coupled with ~S$20m net profit from SGI, India could potentially break even. This sees our 2018-19 earnings estimates change to S$366m (+1%) and S$464m (+4%) respectively.


Maintain HOLD, target price lifted to S$3.60. 

  • Upside risk exists from a successful signing of a higher tariff PPA for SGPL, while IPO of the Indian business will peg a valuation to it and potentially catalyse share price. Our 2019F target price rises to S$3.60 as a result of our earnings revision (and higher SMM Target Price of S$2.05) and implies 0.3x 2019F PB for SEIL. 
  • Utilities’ valuation is implied at 8.5x 2019F PE. 
  • We maintain HOLD despite the valuation upside of 18%: all this hinges on India delivering on its promises, which has disappointed to an extent over the years. Market is possibly keenly watching on this point, and it is probably too keen to get in at this juncture.

Foo Zhiwei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | 2018-05-04
SGX Stock Analyst Report HOLD Maintain HOLD 3.60 Up 3.280