Conglomerate - CGS-CIMB Research 2018-10-05: 3Q18 Happenings And Results Preview

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KEPPEL CORPORATION LIMITED SGX:BN4 SEMBCORP INDUSTRIES LTD SGX:U96 SINGAPORE TECH ENGINEERING LTD SGX:S63 YANGZIJIANG SHIPBLDG HLDGS LTD SGX:BS6 SEMBCORP MARINE LTD SGX:S51

Conglomerate - 3Q18 Happenings & Results Preview

• We expect q-o-q declines in 3Q18 earnings for Singapore conglomerates/O&M names, except for STE (stronger marine and electronics).
• The lacklustre 2018 order win YTD could be partially made up by slight improvement in margins among the yards. Balance sheet remains a focus.
• Maintain OVERWEIGHT on the sector. Stronger-than-expected acquisition-fuelled growth could be a key catalyst. Prefer ST Engineering (SGX:S63) for 3Q18 results.

No sitting duck

Think outside the box

• Limited organic growth has forced Singapore conglomerates to go beyond existing their turf, notably in the past six months.
  1. Sembcorp Industries (SGX:U96) acquired mini-power plants in the UK at c. £286m, adding S$30m-40m to FY19F earnings. It also clinched a 15-year 250W PPA with Bangladesh government, locking in c.19% of SGPL’s capacity.
  2. To expand the aircraft engine value chain, ST Engineering (SGX:S63) acquired nacelle manufacturer MRA Systems at US$630m, potentially resulting in +15-18% y-o-y earnings growth in FY19F.
  3. Keppel Corp (SGX:BN4) proposed to gain control of M1 (SGX:B2F) as well take Keppel T&T (SGX:K11) (private which could transform the conglomerate into a cloud giant in the longer term. In the near- term, it should be 1-4% earnings accretive. Corporate costs for ST Engineering and Keppel Corp could spike in 2H18 as a result of the above.

Keppel Corp (Results release: 18 Oct 2018) 

Lower divestment gains, more land sale

• We estimate Keppel Corp (SGX:BN4)’s 3Q18 net profit at c.S$277m (-9% q-o-q, -5% y-o-y), mainly due to the absence of one-off gains of S$60m (dilution of KDC REIT (SGX:AJBU) placement and net fair value gain from Nassim Woods redevelopment).
• We expect gains of S$114m from the completion of Beijing Aether’s divestment. Investment division likely turned around with Tianjin land sale, while O&M likely to still be in a loss in 3Q18F.

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Where is O&M in sustainable urbanisation?

• Keppel Corp will kick start the reporting season among the conglomerates on 18 Oct. We think key focus could still be around the latest M1 acquisition and long-term strategy as a conglomerate. Increasingly, we are seeing a slight misfit for the O&M division in the group’s strategy in sustainable urbanisation, connectivity and new economy (e-commerce, logistics, data centres). We still like the O&M division’s aim to move into LNG but the pace is slower-than-expected. High oil price may not lead to the V-shape recovery of newbuild rigs in the next 1-2 years. 
• While Sembcorp Marine (SGX:S51) continued to pursue sizeable O&M projects and investing in infrastructure, Keppel Corp has scaled down its investments. In the longer-term, we believe the group is heading in a direction where it is less reliant on O&M, and a potential merger between KEP O&M and Sembcorp Marine could be a long-term target.

S$70m contracts in 3Q18, S$1.4bn YTD; Tianjin to recognise more in 4Q18

• O&M likely to remain in a loss as revenue recognition for Awilco semi-subs will start in 4Q18. Only c.S$70m of contracts were secured in 3Q18. Clarksons reported that Keppel has secured two units of LNG vessels from Avenir (estimate at c.S$110m) in Oct 18, bringing YTD order wins to S$1.4bn.

Sembcorp Marine (Results release: 25 Oct 2018) 

Narrower losses q-o-q without one-off costs

• We expect Sembcorp Marine (SGX:S51) to report narrower losses of S$20m-25m for 3Q18F (2Q18: S$56m loss) with the absence of one-off loss of S$27m from the completion of West Rigel sale. Net gearing likely remained at around 1.2x as more progressive collection was likely offset by working capital needs for sizeable projects, including FPSOs for Statoil and Technip secured in Dec 17 and Mar 18.
• Focus will be on Rosebank and Poly-GCL contracts.

Oil price vs. zero orders in 3Q18

• We think Sembcorp Marine’s recent share price performance is largely correlated to oil price movement, despite seeing zero orders in 3Q18. The award of Rosebank FPSO contract is made complicated by the 40% stake sale by Chevron to Equinor (Statoil). The positive is, Statoil is Sembcorp Marine’s current customer, as it awarded S$662m worth of contracts for the yard in Dec 17 for the construction of FPSO hull and integrated living quarters.
• We still keep our S$2bn order expectations for 2018 vs. YTD orders of S$776m. Narrower-than-expected losses could be a near-term catalyst. Key risk is oil price retreat.

Sembcorp Industries (Results release: 2 Nov 2018) 

India profitable, slight loss at SGPL

• We expect Sembcorp Industries (SGX:U96) to report 3Q18 net profit of S$78m (-5% q-o-q, -14% y-o-y) on the back of fewer lumpy land sales in urban development. 
• Utilities India should turn in lower q-o-q profit of S$25m (3Q18: S$39m) with the absence of cost recovery but sustained strong renewables and spot power prices. SGPL could still be in a slight loss of c.S$5m (2Q18: S$3m loss) as 3Q18 average spot price stood at c.Rs3.83kw/hour, or 8% lower q-o-q. Plant utilisation was also lower for SGPL at c.76% (91% in 2Q18) but steady for TPCIL at 87% (88% in 2Q18). 
• Hyflux Tuaspring bid could be in focus.

Clarity required for Hyflux

• We believe focus for Sembcorp Industries in 3Q18 could be the bid price for Hyflux (SGX:600)Tuaspring plant. Business Times reported that Sembcorp Industries was the only bidder for the plant and that it bid below book value. The Tuaspring project comprises a desalination plant (318,500 cum/day) and a gas turbine power plant (411MW). The desalination plant has a 25-year concession.
• We estimate the book value for Tuaspring to be c.S$900m (S$1.47bn assets and S$567m liabilities) and potential bid price to be slightly above S$600m, assuming Sembcorp Industries takes over the debt. We think market may not appreciate the acquisition as we are still in a power supply glut market. We estimate losses of S$3m-5m per quarter for the utilities power segment in Singapore. Tuaspring acquisition is likely to widen the losses.

ST Engineering (Results release: 14 Nov 2018)

Could be the star of 3Q18

• We estimate ST Engineering (SGX:S63)’s 3Q18 net profit at S$140m (+19% q-o-q, +9% y-o-y). Marine was likely the key driver with stronger ship repair as its US yard started to gain traction in rig repair in the US. Conro provision was likely minimal. Aerospace could report 18% q-o-q decline in profits due to the absence of S$9m divestment gain from Airbus Helicopter. 
• Focus likely to be MRAS acquisition status and production ramp-up potential.

MRAS production ramp-up not fully in the price.

• ST Engineering’s share price is up 7% since the announcement of MRAS acquisition in Sep 18. We believe this has reflected the S$66m annualised profit contribution from MRAS in FY19 (based on annualised 1H18 net profit of S$33m). However, we believe potential upside could come from production ramp-up by MRAS up to 40%, which is not in the price. 
• Our bull-case scenario could add S$92m in FY20F or 12% on top of our existing forecasts.

Yangzijiang Shipbuildings (Results release: 7 Nov 2018)

Fewer deliveries in 3Q18

• We estimate Yangzijiang Shipbuildings (SGX:BS6)’s 3Q18 net profit at Rmb700m (-30% qoq, -20% yoy) with less than 10 vessels being delivered and shipbuilding gross margins of 16.5% (2Q18: 21%).

Weaker orders and fewer vessel deliveries in 3Q18

• Clarksons reported that Yangzijiang Shipbuildings delivered six vessels in 3Q18 but we think the list may not be exhaustive. However, we are also not expecting as many deliveries as 2Q18 (20 units), as guided by the management previously. Hot weather during summer could also slow production progress.
• Order win momentum also slowed in 3Q18. Clarksons reported two 1,800 TEU containerships secured by Yangzijiang Shipbuildings in Sep 18. We estimate a maximum of c.US$100m of order wins for Yangzijiang Shipbuildings in 3Q18.

LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-10-05

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