Sembcorp Industries - CGS-CIMB Research 2019-02-22: Making Progress In India


Sembcorp Industries - Making Progress In India

  • Sembcorp Industries’ 4Q18 reported net profit of S$106m beat our expected S$37m, lifted mainly by marine’s unexpected profit and c.S$26m one-off gains in India.
  • While India is making gradual progress in resolving turbine shutdowns and pursuing new PPA, UK is hit by capacity payment suspension in UKPR.
  • At 0.6 FY19 P/BV, Sembcorp Industries is trading below -1 s.d. from its 5-year mean.
  • Key catalysts are consistent earnings delivery from marine and utilities.

Excluding one-off gains, utilities in line

  • Sembcorp Industries (SGX:U96)’s FY18 reported net profit of S$347m was above our S$288m forecast and consensus’s S$317m, lifted by one-offs in 4Q18 in utilities, including
    1. S$17m gain from reduction of operational and tax costs as a result of the merger of TPCIL and SGPL, and
    2. S$9m O&M contract settlement in SGI.
  • Ex-one-offs, utilities 4Q18 core net profit was S$38m (vs. our S$34m).
  • Urban development net profit of S$33m beat our expected c.S$20m, thanks to land sale in Vietnam and China.
  • FY18 DPS of S$0.04 was declared.

Making good progress in India

  • TPCIL and SGPL are now known as SEIL project 1 and project 2, respectively.
  • Excluding one-offs, SEIL turned in a loss of S$7m as plant load factor (PLF) of 52% was below the breakeven level (75-80%) with the shutdown of turbine 1. This will be resolved by end- Feb (loss of c.S$7m likely in 1Q19). SEIL project 2’s net loss narrowed S$7m q-o-q to S$17m in 4Q18, riding on stronger spot prices with IEX averaging Rs4.6/kwh (3Q18: Rs3.83/kwh).
  • SEIL also received a letter of award (LOA) to supply 500MW to Andhra Pradesh for 8 years; while the timeline is not firm, we believe this should start within 2019. The export of 250MW power to Bangladesh started in Feb 19. These should support our profit forecast of S$52m in FY19F (+17% y-o-y) for India.

Watchful on UK, net

  • After two quarters of losses, UK/America returned to net profit in 4Q18 at S$9m on seasonal strength. However, UKPR was affected by the recent ruling by the European Court Justice to suspend capacity market payment after Tempus Energy’s appeal on the auction process. The decision means the UK government cannot issue capacity market payments to gencos or hold auctions to secure additional power capacity for the winter of 2019/2020 and 2022/23.
  • The capacity market allows gencos to bid for contracts to provide back-up power to the grid during times of peak demand over the winter months, which got us excited about Sembcorp Industries’ acquisition of UKPR in 2018. This negative development will have a S$15m knock-on effect on UKPR’s 2019 capacity payment. There will also be an 11-week shutdown in Wilton 10.

Maintain ADD but lower SOP-based Target Price to S$3.41

  • Our FY19-20F EPS is cut by 4-7% to reflect stronger urban development, offset by recent marine earnings downgrade and weaker earnings in the UK and Singapore utilities business. 
  • Regulatory changes and prolonged plant shutdown are risks.

Competitive Singapore retail market; reduced volume in China

  • Singapore’s 4Q18 net profit of S$30m (-18% y-o-y, -35% q-o-q) included one-off Open Electricity Market customer acquisition costs. The power spread remained challenging, with five new electricity retailers entering the market in 2018.
  • China’s 4Q18 net profit of S$17m (-54% y-o-y, -22% q-o-q) was due to lower contribution from Chongqing Songzao and reduced volume in some of the wastewater treatment plants.

LIM Siew Khee CGS-CIMB Research | 2019-02-22
SGX Stock Analyst Report ADD MAINTAIN ADD 3.41 DOWN 3.490