Sembcorp Industries - DBS Research 2019-05-16: India On Recovery Track


Sembcorp Industries - India On Recovery Track

  • Sembcorp Industries's 1Q19 results largely in line, lifted by UKPR contribution.
  • Expect sequential growth with India operational improvement.
  • Marine YTD contract flow lag expectations; lowered FY19/20 earnings by 2%/6%.
  • Reiterate BUY; Target Price S$3.90.

Maintain BUY; Target Price S$3.90.

  • SEMBCORP INDUSTRIES LTD (SGX:U96) offers a unique value proposition as a proxy to ride the cyclical O&M upturn, while supported by a defensive utilities business.
  • India operations have showed signs of turnaround with an improving spread and the commencement of long-term PPAs. This should re-rate Sembcorp Industries’s Energy (renamed from Utilities) business, which is undervalued at 0.6x P/BV and 6x PE against 6-7% ROE.

India power segment on recovery path; remains long-term growth engine.

  • Sembcorp Industries’s India operations swung from a loss of S$58m in 2017 to a profit of S$47m in 2018, and the positive trend should continue. The power market in India is recovering with current peak surplus expected to reverse by FY20 according to independent research house CRISIL, driving up tariffs. India remains a key growth driver, accounting for 15- 20% of earnings.

Where We Differ:

  • We believe in the long-term growth prospects of Sembcorp Industries’s Energy arm, which has expanded its global footprint into key emerging markets – India, Bangladesh, Vietnam and Myanmar.
  • We hold on to our belief of a potential merger between Keppel’s O&M arm and Sembcorp Marine (SGX:S51) in view of keener competition in the sector. The potential spin-off of its marine arm could re-rate Sembcorp Industries’s undervalued utilities business that is being overshadowed by the cyclical marine business.


  • We derive our fair value for Sembcorp Industries based on the sum of its different parts, with a 10% conglomerate discount to the RNAV, arriving at a Target Price of S$3.90, translating into 1x P/BV. Refer to attached PDF report for SOTP valuation details.

Key Risks to Our View:

  • Key risks to earnings are further delays in marine contract wins, deterioration of Singapore's power spark spreads, and execution hiccups at its Indian power plants.

WHAT’S NEW - UK Power Reserves the major contributor to earnings growth in 1Q19 while India numbers were also encouraging

1Q19 results largely in line.

  • Sembcorp Industries’s net profit grew 21% y-o-y to S$93m in 1Q19, making up 22% of our full-year estimate.
  • We expect sequential improvement as we enter the peak season for India renewables, and commencement of long-term PPAs (~57% of capacity) for SEIL Project 2, as well as marine earnings recovery.

Stellar Energy performance.

  • The Utilities segment has been renamed to Energy segment. Profit rose 21% y-o-y to S$85m, contributing to growth of group profit in 1Q19. Profit was lifted by the recognition of peak winter availability payment of ~S$16m for UK Power Reserves that was acquired mid last year.
  • India operations reported a narrower core loss of S$7m in 1Q19 (vs -S$16m in 1Q18 and -S$23m in 4Q18), attributable to resumption of SEIL Project 1 Unit 1 and commencement of Bangladesh PPA (~19% capacity of SGPL) towards end- February, as well as lower coal cost.
  • We expect India operations to return to black the following quarters and churn ~S$70m profits for the full year (up from S$47m in FY18):
    1. We are going into a peak renewable generation in 2Q- 3Q which generated S$15-20m profit a quarter during the same periods last year.
    2. The full impact of resumption of SEIL Project 1 Unit 1 would be seen in 2Q (S$11m loss in 1Q19). Prior to shutdown, it generated ~S$15m/quarter. There will also be compensation for loss of income during the partial shutdown which could be received by the end of 2019.
    3. The second long-term PPA for SEIL Project 2 to supply 500MW of power to Andhra Pradesh for eight years (~38% capacity) is expected to commence in 2H19. SEIL Project 2 typically incurs losses of approximately ~S$15- 20m a quarter. It made a small profit of S$2m in 1Q19 on the back of lower coal cost. While the higher spread in 1Q might not sustain, we expect the plant to almost break even with the long-term PPAs and overall improving market supply/demand dynamics.
  • In Singapore, the power market remains competitive, but the retail business is doing relatively well. On carbon tax, we estimated that the implementation could result in an additional S$15-20m in costs, of which a big chunk should be passed on to customers.

Urban development segment

  • Urban development segment generated profit of S$7m (-30% y-o-y) in 1Q19 with strong contribution from Vietnam but lower contribution from China. We are not overly concerned with the decline at this juncture as land sales tend to be lumpy and the property market is picking up in China.
  • Healthy net orderbook of 408 ha would be recognised as land sales over the next 2-3 years. In addition, we will also see recognition of income from the sale of Riverside Grandeur Residential development in China as progressive handover is expected in 2019.


  • Marine subsidiary – 61%-owned Sembcorp Marine reported a headline net profit of S$1.8m in 1Q19. Excluding non-recurring items (accelerated depreciation, impairment and tax credit), the net profit would have been ~S$10m, slightly lower than S$13m a quarter ago.
  • YTD wins of S$175m lagged expectations. While overall improvement and offshore capex will take time to translate into new orders, management is hopeful that the higher enquiry levels and tendering would translate into higher contract wins and thus top line and bottom line.

Pei Hwa HO DBS Group Research | 2019-05-16
SGX Stock Analyst Report BUY MAINTAIN BUY 3.900 SAME 3.900