Sembcorp Industries - CGS-CIMB Research 2018-08-03: On Track For Real Growth In 2019

SEMBCORP INDUSTRIES LTD SGX:U96

Sembcorp Industries - On Track For Real Growth In 2019

Sembcorp Industries’ 2Q18 net profit in line with our S$75m. 1H18 net profit formed 50% of FY18F.
India surprised with an S$39m profit due to S$11m billing recovery and higher spot prices (IEX prices up 14% q-o-q). This has accelerated its turnaround. However, India IPO timeline could take longer to materialise given the negative market.
The UK business suffered a loss of S$4m due to UKPR transaction costs.
We think Sembcorp Industries is set for 26% y-o-y growth in 2019 backed by sustained profits from India and stronger UK contribution (UKPR starts contributing in 1Q19).

Sembcorp Industries’ stub valuation is cheap at 0.3x CY18 P/BV (ROE: 7%). Maintain ADD with an unchanged SOP-based Target Price of S$3.49. Stronger India could be a key catalyst.

Utilities India achieved a profit of S$39.4m vs. our S$5m profit forecast. This includes an S$11m recovery from customer.
Excluding the recovery, the profit breakdown for India was TPCIL: S$14m, SGI wind: S$17m, and SGPL: -S$3m. SGPL benefitted from better plant load factor (PLF) of 91% on high demand during the hot season; and higher tariff rates. IEX spiked from c.Rs3.48/kwh in 1Q18 to Rs4/kwh. SGI also enjoyed high wind season. Indian Energy Exchange (IEX) for Jul has retreated to c.Rs3.45/kwh. The 2Q18 spike in spot prices has accelerated India’s turnaround and we now expect FY18F net profit to be S$17m (previously S$3m), assuming IEX prices dip in 2H18 to 1Q18 level.

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This includes S$4m strategic fuel sales. SCI is said to be bidding for Hyflux’s 411MW power plant but we think this may not bode well in terms of balance sheet in a power supply glut market.

Urban development profit of S$35m (+269% q-o-q, +316% y-o-y) was from strong sale from commercial and residential land sale in Chengdu. This trend could be lumpy. 1H18 net profit from Urban was S$45m or 64% of our FY18 forecast of S$70m.

UK registered a loss of S$3.9m vs. average profit of S$8m/quarter in the past year. The loss was due to c.S$7m transactional loss related to UKPR, of which part of it could recur in the next 12 months.
Going into 3Q18, we also expect a slight loss of S$2m from UK/Americas as Wilton plant is due for a 4-week shut down. We have also penned in profit contribution of UKPR starting FY19 of c.S$15m p.a. (based on 30:70 debt:equity funding at 7%).

We expect India to remain profitable in 3Q18 on strong winds and steady PLF among the coal power plants with lower spot prices. 4Q18 will be a loss from weaker wind. UK to remain weak in 2H18 while China could see strong seasonal effect in 4Q18.
We are still expecting some gains from the finalisation of South Afria’s Sembcorp Siza Water by 2H18. FY19 could be a real turnaround year for utilities with
1. India sustaining profits,
2. stronger UK from UKPR, and
3. contribution from Bangladesh power plant.

Our FY18-20F EPS is adjusted by 0.6-14% for marine losses and UKPR contribution. Ex-SMM, its utilities business is cheap at 0.3x CY18F P/BV (-2 s.d. since 2010) vs. ROE 7%.
Catalysts include stronger-than-expected profit from India via export to Bangladesh or higher spot prices.
Downside risks include prolonged unplanned shutdown in plants.

LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-08-03

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