Sembcorp Industries - CGS-CIMB Research 2019-05-15: India Heading In The Right Direction


Sembcorp Industries - India Heading In The Right Direction

  • The key surprise of Sembcorp Industries’ 1Q19 results was its second power plant in India turning in a S$2m profit from a S$17m loss in 4Q18 thanks to lower coal cost.
  • UK profit grew 167% q-o-q with stronger UKPR from triad payment during winter. China grew 71% q-o-q from stronger coal and wind generation.
  • Sembcorp Industries is cheap, trading at 0.6x FY19 P/BV. Consistent performance from its India operations is a key catalyst.
  • Maintain ADD and Target Price of S$3.41.

1Q19 net profit accounted for 22% of our FY19F forecast

  • SEMBCORP INDUSTRIES LTD (SGX:U96) reported a 1Q19 net profit of S$93m (+21% y-o-y), broadly in line with our S$87m expectations but below consensus’ S$106m.
  • The energy division (previously known as utilities) posted a profit of S$85m (+31% q-o-q, +21% y-o-y) with China being the largest contributor (34%) at S$29m, followed by Singapore (S$25m) and UK (S$24m).
  • In the rest of the year, there will be 11-week planned plant shutdowns in the UK and Singapore, which may result in lumpy earnings. The actual timeline of the shutdowns has not been disclosed.

Coal cost helps SEIL 2 India

  • SEIL project 1 turned in a 1Q19 loss of S$11m that was attributed to
    1. c.75 days downtime of turbine 1 from Nov 18 to Feb 19 which resulted in a below-optimal plant load factor (PLF) of 53%; and
    2. a one-off S$6m provision for credit loss (to Andhra Pradesh) though with chances of a reversal ahead.
  • There was little coal cost savings for SEIL 1 under cost pass through mechanism. However, SEIL 2 posted a S$2m profit in 1Q19, thanks to lower coal costs (c.US$97/ton compared to c.US$103/ton in previous year) and better short-term contracts (clinched at higher tariffs in 2018).
  • We think SEIL 2 could potentially sustain the gains ahead should coal prices and PLF (+80%) remain at current levels. SGI wind turned in a profit of S$2m that included a reversal of accrued maintenance fees no longer payable.

Bump up in winter gains from the UK

  • The UK business surprised on the upside as UKPR received payment during winter. The gains, however, should come off in 2Q and 3Q this year in the absence of triad payments as the first quarter typically marks the end of winter. Excluding UKPR, UK contributions would have been lower due to shutdowns in Biomass Power Station and Wilton 11 plant.

China seasonally strong, Singapore challenging

  • China contributed a net profit of S$29m in 1Q19, benefitting from power generation in coal plants due to lower hydro power available in Chongqing. 2Q and 3Q are seasonally weaker as alternative hydro power is available in place of Sembcorp Industries’ wind generation.
  • The Singapore power market remained challenging with spark spread under pressure from competition. Management did not provide a clear outlook on whether earnings have bottomed.

Maintain ADD, SOP Target Price of S$3.41, long-term value stock

  • At 0.6x FY19 P/BV, Sembcorp Industries is trading at -1 s.d. of its 5-year mean. The energy division is trading at an implied FY20F P/E of 6.5x and 0.55x P/BV vs. 6% ROE.
  • Cash call from Sembcorp Marine (SGX:S51) is a downside risk.

LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-05-15
SGX Stock Analyst Report ADD MAINTAIN ADD 3.410 SAME 3.410