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

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.

Surprise #1: Higher profits in India from spot and cost recovery

  • 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.

~ ~ Where SG investors share

Surprise #2: Singapore profit up 19% q-o-q to S$43m

  • 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.

Surprise #3: Urban development’s strong land sale in Chengdu

  • 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.

Surprise #4: UK in a loss but this will reverse from 1Q19

  • 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%).

2H18 and 2019 outlook

  • 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.

Maintain ADD and SOP-based Target Price of S$3.49

  • 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 | 2018-08-03
SGX Stock Analyst Report ADD Maintain ADD 3.490 Same 3.490