Sembcorp Industries - CGS-CIMB Research 2018-07-10: Utilities At Undemanding Valuations

SEMBCORP INDUSTRIES LTD SGX:U96

Sembcorp Industries - Utilities At Undemanding Valuations

We expect Sembcorp Industries (SCI) to deliver a 2Q18 net profit of S$75m (-2% q-o-q, +35% y-o-y), after incorporating the loss in Sembcorp Marine (SMM).
Utilities should see a stronger profit of S$83m (+18%, +8% y-o-y) on the back of a seasonally-stronger wind load factor in SGI.
We think SCI stub valuations are undemanding at 0.3x CY18F P/BV (-2 s.d since 2010) vs. ROE of 7%. Catalysts could come from the listing of its India operations.

India should turn in a profit of S$5m-7m in 2Q18F led by a seasonally-stronger wind load factor for SGI. We also expect higher y-o-y contributions from SGI as a result of an increased stake from c.72% in 2Q17 to an effective c.93% currently.
Plant load factors (PLF) for TPCIL and SGPL also improved from c. 84% in 1Q18 to c. 90% in 2Q18. Spot power prices improved q-o-q to c.Rs4/kwh from c.Rs3.50/kwh in 1Q18. This analyst report is shared at SGinvestors.io.

We expect Singapore to remain stable q-o-q with a net profit of c.S$35m supported by a stronger uniform Singapore energy price (USEP) trend. Average USEP prices grew 15% q-o-q on the back of the stronger oil price. We think this could provide some buffer to margins within the power segment.
We expect China earnings to come in at S$20m (-39% q-o-q, +120% y-o-y) on the back of lower PLF for Chongqing coming out of winter. This analyst report is shared at SGinvestors.io.

In 2Q18, Sembcorp Industries (SCI) made some progress in recycling the utilities asset base, hiving off some of the non-core assets, including the divestments of Sembcorp Tay Paper (S$6m) and medical waste division (S$20m).
The divestment of municipal water operations in South Africa, Sembcorp Siza, is still pending the satisfaction of certain condition precedents.
Sembcorp Industries also announced a 50MW solar project contract from HDB and EDB which will commission by 2Q20, in addition to taking a 77% stake in Vellocet Clean Energy for A$5m to grow in the Australian power market. This analyst report is shared at SGinvestors.io.

We revise our EPS by 10-17% for FY18F-20F to incorporate the order win cut in Sembcorp Marine (SMM). Our Target Price remains unchanged at S$3.49, still based on SOP valuations.
Ex-SMM, its utilities business is trading at an undemanding valuation of 0.3x CY18F P/BV (-2 s.d since 2010) vs. ROE of 7%.

LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-07-10

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