Sembcorp Industries Ltd: India operation turned around August 7, 2018

PSR Recommendation: BUYStatus: MaintainedTarget Price: SGD3.70
  • 2Q18 revenue and net profit met our expectation.
  • Utilities in both Singapore and China delivered healthy And India turned profitable, but some operational issues remain.
  • Marine segment still dragged the group improvement.
  • We lowered our FY18e EPS from 18.9 SG cents to 17.7 SG cents, due to prolonged weak profitability from SMM. After incorporating a lower target price of S$1.78 for SMM, based on sum-of-the-parts method, we maintain our call to BUY with a lower target price of S$3.70 (previously S$3.83).

The Positives

+ Utilities’ Singapore operation is stable: In 2Q18, net profit from Singapore was S$43.3mn (+ 4.3% YoY). However, higher high sulphur fuel oil (HSFO) price and intense market competition extended into 2Q18. This year they have secured 94MW of solar power capacity and become the second largest renewable energy player in Singapore. Meanwhile, the group reinforced the position of a leading gas player in Singapore they are first imported LNG cargo on a spot basis.

+ Utilities’ China operation performed well: In 2Q18, net profit from China arrived at S$15.1mn (+65.9% YoY) due mainly to the contribution of the Changzhi water treatment plant and higher spark spread from SongZao thermal power plant. 

+ Utilities’ India operation turned profitable: In 2Q18, net income from India came in at S$39.4mn (2Q17: S$-3.2mn). The net profit and plant load factor breakdowns are shown in Figure 1. The turnaround of performance in 2Q18 was due mainly to the high wind season and lower loan balance and the interest rate charged for Utilities’ India operations. It is worth noting that SGPL is subject to short-term power purchase agreements, but the average power selling price has been higher.

The Negatives

– Several concerns on Utilities’ India operation: Thermal coal prices imported from the overseas market are higher than the domestic market. The major source of coal supply to TPCIL and SGPL is still imported coal. Hence, the spark spread is compressed. Meanwhile, the group is also concerned about collecting from their power purchaser receivables. Management mentioned that they would continue to optimise the cash conversion cycle.

– Marine segment continued to encumber the group’s performance: Sembcorp Marine (SMM) reported net losses of S$55.6mn. The net order book continues to decline (1H18: S$7.2bn vs FY17: S$8.4bn). Work volume will remain low, and margins are compressed. Operating losses expected for the rest of the current financial year.

Outlook

Sembcorp Industries strategy is to become an integrated energy player. Through the recent acquisitions and investments in Utilities segment, we can see that it is expanding the renewable and clean energy businesses. We expect profit contributions from the recent acquired company, UK Power Reserve, in FY19. On the other hand, we also look forward to the higher profit contributions from Utilities’ India operation moving forward since the domestic market conditions and financial position are improving. Management is sticking to their plan to support SMM through the cycle which is expected to be longer than expected. Therefore, the improvement of group performance as a whole will slow down.  

We lowered our FY18e EPS from 18.9 SG cents to 17.7 SG cents, due to prolonged weak profitability from SMM. After incorporating a lower target price of S$1.78 for SMM, based on sum-of-the-parts method, we maintain our call to BUY with a lower target price of S$3.70 (previously S$3.83).

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Chen Guangzhi
Investment Analyst
Phillip Securities Research Pte Ltd

Guangzhi graduated from Singapore Management University with a Master degree in Applied Finance and from South China University of Technology with a Bachelor degree in Electronic Commerce.

The current sector coverages include Energy, Utilities, and Mining sectors. He has 3 years experience in equity research in both Hong Kong and Singapore market. He is the mandarin spokesperson for Phillip Securities Research in relation to China-related projects and all mandarin seminars and client events.

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