• 1Q18 revenue met our expectation while net profit missed substantially, due mainly to weak performance from the marine
• Utilities’ Singapore operation remained flat, encountering margin compression.
• Utilities’ India’s performance was negatively impacted by SGPL and SGIL, due to a majority or short-term PPAs were contracted at lower tariffs under SGPL and low wind season in 1Q18 for SGIL.
• Marine segment continued to weaken the group’s profitability.
• We tweak down the FY18e EPS from previous 19.8 SG cents to 18.9 SG cents, due to prolonged weak profitability from SMM. After incorporating a lower target price of S$1.85 for SMM, based on sum-of-the-parts method, and we upgrade our call to BUY with a lower target price of S$3.83 (previous S$3.86) due to the higher expected return from last closing price

The Positives

+ Utilities’ Singapore operation remained flat. In 1Q18, net profit from Singapore arrived at S$35.2mn (Up 3% YoY). Singapore operation continued to face margin compression due to higher high sulphur fuel oil (HSFO) price and competitive environment. Currently, the retail margin is higher than wholesale margin, and management expected the gap between both would narrow in the foreseeable future.

+ Utilities’ China operation was benefited by seasonality. In 1Q18, net profit from China jumped by 48% YoY to S$32.7mn, due to longer servicing hours from Anwen power plant, mine-mouth coal-based plant in Chongqing China. It was attributable to the abnormally cold weather during the winter period.

The Negatives

– Utilities’ India’s performance was negatively impacted by SGPL and SGIL. In 1Q18 net losses from India dropped moderately by 6% YoY to S$15.6. SGPL and SGIL reported losses of S$24.5mn and S$6.5mn respectively, due mainly to a temporary shut-down of plants for 2 weeks under SGPL and a low wind season for SGIL. 60% of capacity under short-term power purchase agreements (PPA) will be expired in May and June, and the rest were contracted till Sep-18. Medium and long-term contracts are not available currently. Therefore, those contacts that will be rolled down are expected to be contracted under short-term PPAs. However, the current spot and short-term tariff improved drastically; average monthly price in Apr-18 was Rs4.15/kWh (Up 53% YoY).  The prevalent bid for short-term PPAs (6 months) ranges from Rs4/kWh to Rs7/kWh.

– Marine segment continued to weaken the group’s profitability. On Jan-18, SMM adopted Singapore Financial Reporting Standards (International) 15 (SFRS 15). Excluding the effects of SFRS 15, revenue would have only increased by 15% YoY, and a S$33mn net loss reported. The net order book continued to decline (1Q18: S$7.7bn vs FY17 (restated): S$8.4bn).

Outlook

For Utilities’ segment, management expected India operation as a whole will be profitable on an annual basis, which is supported by the more than 70% of the capacity are contracted under higher value PPAs that management aims to secure, including short and medium terms. Moreover, both positive and negative seasonal impacts on China and India are expected to be smoothed on a full year basis. On the other hand, though oil prices continued to rally, and capex on upstream exploration and production improved gradually, the market will take a few more quarters to recover since oversupply prevails. Hence, the group will continue to be dragged by SMM’s business in next few quarters.

We tweak down the FY18e EPS from previous 19.8 SG cents to 18.9 SG cents, due to prolonged weak profitability from SMM. After incorporating a lower target price of S$1.85 for SMM, based on sum-of-the-parts method, and we upgrade our call to BUY with a lower target price of S$3.83 (previous S$3.86) due to the higher expected return from last closing price.