Sembcorp Industries Ltd: Underlying business trend remains unchanged November 6, 2017

PSR Recommendation: ACCUMULATEStatus: MaintainedTarget Price: SGD3.70
  • Revenue and net profit missed our full year expectation by 5.5% and 22% respectively.
  • In Utilities segment, Singapore market continued to deliver favorable performance while India market dragged. Marine profitability remained weak.
  • We lowered our FY17e earnings by 25.2%. Bulk of our downward earnings revision comes from Marine division.
  • We raised our target price to S$3.70 to account for the higher valuation on SMM.

Positives

+ Utilities’ Singapore operation continued to deliver strong performance: In 3Q17, net profit from Singapore arrived at S$51.4mn with 52.1% YoY growth. The strong growth was mainly driven by 105% YoY increase in net profit from Energy segment. Water and On-site logistics & solid waste management segment reported a 16.8%YoY and 6.5%YoY growth respectively in 3Q17. 9M17 net profit from Singapore accounted for c.53% of total net profit excluding corporate and exceptional item in utilities segment. Singapore operations continue to benefit from the improvement of centralised utilities and gas divisions despite the intense competition.

Negatives

– Utilities’ India operation was dragged by SGPL’s losses: In 3Q17, TPCIL and SGI reported profit gains of S$11mn and S$14mn respectively, but SGPL made losses of S$26mn though the interest burden was mitigated due to the completion of refinancing in 2Q17. The loss-making was due to the worsening of spark spread since the power tariff was lower while coal price trended up. SGPL still operated on the short-term rolling contracts as of now.

– Marine segment remained weak profitability: Sembcorp Marine (SMM) generated S$1.7mnnet profit in 3Q17 while it made S$21.8mn losses in 3Q16. The 9M17 net profit slightly grew by 3%YoY to S$28mn, but it incorporated the gain from the divestment of COSCO stake for S$46.8mn. Therefore, profitability did not turn around YTD. (For updates on SMM, please refer to our report on 2nd-Nov: Sembcorp Marine Ltd – Performance remains weak).

Outlook

India’s power market remains tight as some domestic plants have failed to gain access to either local coal or imported coal supply, but neither TPCIL nor SGPL has such an issue. It is expected that SGPL will suffer from the fluctuation of spark spread. Currently, the power spot price is coming near the cash cost for SGPL. TPCIL and SGI still deliver favourable performance, especially the latter keeps securing new orders to tap into the domestic renewable energy market. Oil and gas market is riding on the recovering momentum. We believe SMM will have more order flows from non-drill solitons.  However, it will take time for it to improve the profitability.

Maintain ACCUMULATE with a slightly higher target price of S$3.7

We revise down the FY17e EPS (from 22.6 SG cents to 16.9 SG cents) and FY18e (from previous 24.5 SG cents to 17.8 SG cents) due to the expectation of continuous weak profitability from the marine segment. After incorporating higher target price of S$1.91 for SMM (previously S$1.55), based on sum-of-the-parts method, we maintain ACCUMULATE with a slightly higher target price of S$3.70.

Valuation Table

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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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