Sembcorp Industries - UOB Kay Hian 2019-02-22: 4Q18 Utilities Finds A Base As The Outlook Brightens


Sembcorp Industries - 4Q18: Utilities Finds A Base As The Outlook Brightens

  • Sembcorp Industries reported 4Q18 headline net profit of S$106m, with core net profit at S$74m on the low end of our expectations. 2018 core net profit was S$318m, forming 99% and 101% of our and consensus forecasts respectively.
  • India posted a smaller loss, albeit helped by several O&M contract settlements and tax gains. UK disappointed but is expected to improve.
  • Earnings outlook is improving, but we remain cognisant of the risk that comes with the marine segment’s balance sheet.
  • Maintain BUY and target price of S$3.20.


4Q18 headline net profit of S$106m, largely within expectations.

  • SEMBCORP INDUSTRIES LTD (SGX:U96) reported headline net profit of S$106m (-10% y-o-y, +29% q-o-q) in 4Q18.
  • Included in the results was one-off net gains of S$32m (by our estimate), comprising divestment gains from its Utilities and Others businesses, an impairment of PPE at its India renewable business and settlement with O&M contractors. Excluding the one-offs, core net profit was S$74m (-20% y-o-y, -4% q-o-q), slightly below our expectation of S$77m.
  • 2018 headline net profit was S$347m (-9% y-o-y), with core net profit at S$318m (-27% yoy), forming 99% and 101% of our and consensus estimates respectively. Earnings were largely in-line, albeit at the lower-end of our estimates.

Improvement in India drove Utilities’ earnings of S$64.5m.

  • Utilities 4Q18 net profit was S$65m (+364% y-o-y), helped by lower losses from India. Core net profit was S$64m, after reversing the impact of S$8m gains from disposal of the municipal water operations in South Africa and S$7m non-cash expense of UKPR’s capitalised cost upon refinancing.
  • Core net profit included S$21m in net gains stemming from its India operations.

India losses narrowed to S$7m.

  • SEIL Project 1 (fka TPCIL) reported net profit of S$10m (-31% q-o-q), helped by S$17m in operational tax benefit. There was no recognition from insurance for Unit #1’s outage in 4Q18. SEIL Project 2 (fka SGPL) reported a 30% q-o-q drop in net loss to S$17m, helped by higher prices.
  • SGI reported breakeven (S$0m), with results incorporating S$7m settlement with O&M contractors, offset by S$5m in impairments. Core net loss was closer to S$28m for 4Q18 excluding these items, bringing 2018 figure closer to a net loss of S$2m, vs the headline profit.

India profitability outlook improves.

  • Unit #1 at SEIL Project 1 is expected to be back online by end-Feb 19. SEIL Project 2 showed result in its quest for new PPAs, with receipt of a letter of award to supply 500MW for 8 years, subject to regulatory approval. No timeline could be provided.
  • Driving further profitability for India will be the tightening of O&M costs at SGI, and we think the lower losses in 4Q18 for SGI despite a higher capacity base reflects that.

UK disappoints on losses at UKPR.

  • UK net profit for 4Q18 was S$9m (4Q17: loss, 3Q18: loss). UKPR reported 4Q18 net loss of S$9m owing to a suspension of the capacity market. Included within the S$9m was a S$3m restructuring write-off that is separate of the S$7m non-cash expense for capitalised cost upon refinancing. Offsetting the loss was S$18m net profit from the Wilton units, helped by stronger performance from Wilton 10.
  • The UK operation is expected to deliver better profitability in 2019, with full-year contribution from UKPR.
  • Conservatively, contributions will be small relative to the earlier guidance of S$15m as the capacity market remains suspended, and Sembcorp Industries will need time re-tool the asset to ply other markets.

Urban development: Net profit of S$33m.

  • This included S$16m gains from en-bloc sale of its property developments in Wuxi. Land sales in 2018 totalled 307ha, of which about 270ha were related to industrial & business. Net orderbook stands at a record 425ha.
  • Profitability for the unit is expected to gather momentum in 2019 on recognition of income from progressive handover of its residential development, Riverside Grandeur in China.

Dividend of 2 S cents declared.

  • This was below our 4 S cents expectations, and is reflective of Sembcorp Industries’ prudence in capital management.


Utilities earnings turning around, albeit gradually.

  • The profitability outlook for Sembcorp Industries is finally improving. Earnings growth will primarily be driven by India, followed by the UK and Bangladesh’s Sirajganj in 1H19. Coupled with the earnings recovery from Sembcorp Marine (SGX:S51), Sembcorp Industries’s ROE recovery will be a modest 5.1% in 2018 to about 6% in 2019.
  • Marine appears to be the bigger driver of earnings for 2019 than the Utilities business.
  • India remains the biggest driver of Utilities growth, yet it hinges heavily on SEIL Project 2 securing PPA awards. This has proven to be a rather long-drawn process, and thus this drives our outlook for a moderate improvement at best.


Lower 2019-20 net profit forecasts by 2-3%.

  • We have adjusted our earnings downwards as we build in a weaker earnings recovery from the Utilities business, offset by the earlier-than-expected pick-up from the marine business. Our revised net profits are S$395m (-2%), S$419m (-3%) for 2019-20, and introduce 2021 net profit at S$424m.

Marine balance sheet remains key risk.


Maintain BUY and target price of S$3.20.

  • Our target price dips slightly by 2% to S$3.14 due to revisions to our Utilities earnings forecast.
  • Given the small difference, we maintain our target price of S$3.20. This pegs the Marine business at our S$1.83 target price for Sembcorp Marine and 9.6x 1-year forward PE for the Utilities business.

Foo Zhiwei UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-02-22
SGX Stock Analyst Report BUY MAINTAIN BUY 3.200 SAME 3.200