• FY17 revenue and net profit substantially missed our expectation, due mainly to unexpected weak performance from marine segment in 4Q17.
• Utilities’ Singapore generated moderate growth but the group’s performance was dragged by weak India and marine operations.
• A new strategy for the group: reposition utilities, support marine segment and move up value chain of urban development segment.
• Short-term catalysts:
  • Divest some peripheral utilities assets to supplement cash reserves up to S$0.5bn.
  • Propose IPO of India energy business under Sembcorp Energy India Limited.
• We tweak up the FY18e EPS from previous 17.8 SG cents to 19.8 SG cents, due to the expectation of an improvement stemming from the new strategy. We maintain our call ACCUMULATE with a higher TP of S$3.86 (previous S$3.7) as earnings was raised.

The Positives

+ Utilities’ Singapore operation deliver a moderate growth. In 4Q17, profit from operation (PFO) from Singapore arrived at S$40.6mn (Down 32% YoY), resulting from the lower contribution from energy segment (4Q17: S$21.3mn vs 4Q16: S$36.1mn). A higher high sulphur fuel oil (HSFO) price further suppressed profit margins. However, FY17 PFO grew by 10% YoY to S$217.4mn. The drop in PFO from On-site Logistics & Solid Waste Management was fully offset by the growth in PFO from Energy and Water. Net profit from Utilities’ Singapore increased by 24% YoY to S$163.6mn, underpinning the improvement of centralized utilities and gas businesses in FY17.

The Negatives

– Utilities’ India’s performance was dragged by SGPL. 4Q17 PFO from India arrived at S$37.6mn (Up 45% YoY), and FY17 PFO arrived at S$329.4mn (Up 38% YoY). However, net loss in FY17 expanded to S$57.8mn (FY16: -S$16.1mn). In 4Q17, respective net loss from TPCIL, SGPL, and SGIL was S$4mn, S$27mn, and S$5mn. It was mainly attributed to S$39.1 refinancing costs from SGPL, shut-down of some plants, and narrower spark spread owning to higher coal price.  Moreover, there was no group tax relief in India and the tax benefit for losses from a subsidiary in India was not recognised, resulting in the widened net losses.

– Marine segment continued to drag the group’s profitability. 4Q17 net loss from Sembcorp Marine (SMM) was S$35.0mn (net profit in 4Q16: S$30.6mn). FY17 net profit was S$9.9mn (FY16: S$75.2mn). It was due to lower profits from drilling solutions and offshore platforms. The net order book continued to decline to S$7.6bn ($3.1bn from Sete Brasil drillship projects) as of Dec-17.

Strategy review summaries:

Utilities:

1. Focus on gas & power, merchant and retail power, and renewable energy businesses.
2. Balance the current portfolio geographically with deepening presence in 4 key markets: UK, China, India, and Singapore and Southeast Asia.

Key catalysts:

• Divest some peripheral utilities assets to supplement cash reserves up to S$0.5bn.
• Propose IPO of India energy business under Sembcorp Energy India Limited.
• Double the renewable capacity to 4,000MW by 2020; Reduce carbon mission from current 0.55tCO2/MWh to 0.42tCO2/MWh by 2022 and 0.40tCO2/MWh by 2030.

Marine:

3. Support the Marine segment through the cycle.

Urban development:

4. Move up the value chain aiming to develop integrated townships and business hubs & smart cities.

Goal: Return to double-digit ROE.

Outlook

Management unfolds the 3-step plan, namely reposition, growth, and sustainable value creation. To gain back the double-digit ROE that contains both organic and inorganic growth, the group will start to increase cash reserves internally. We believe that plants under TPCIL, SGPL, and SGIL are quality assets. Given the current bullish market condition, the Group could monetise these assets at good prices if it proceeds the IPO in the near term. However, the expectation of prolonged weak profitability from marine segment could stall the recovery on the group level in the short term. On a long-term perspective, we think it is in the right direction. After all, clean energy gradually will become one of the mainstream developments in the foreseeable future. The diversified global footprints that it is going to be entrenched ensure a higher growth while lower operational risks.

We tweak up the FY18e EPS from previous 17.8 SG cents to 19.8 SG cents, due to the expectation of an improvement stemming from the new strategy. After incorporating an unchanged target price of S$1.91 for SMM, based on sum-of-the-parts method, and we maintain ACCUMULATE with a higher target price of S$3.86 (previous S$3.7).

Valuation table