Sembcorp Industries

OCBC on 21 Sep 2015

The stock market, including SCI’s stock, has been relatively volatile. However, it is still business as usual for SCI. In fact it has been expanding its operations, with the groundbreaking of its seventh Vietnam Singapore Industrial Park (VSIP) on 16 Sep and the commencement of full commercial operations for the second 660MW unit in its Indian power project, TPCIL. Currently, the implied utilities stub is trading at about 7x P/E, close to one s.d below its historical average. Considering that utilities is a less cyclical industry (and a growing one for the overseas segment due to rising emerging market demand), as well as SCI’s demonstration of its capabilities in developing and executing large-scale greenfield projects over the years, we believe that the utilities segment has been underappreciated. Meanwhile, as we recently lowered our fair value estimate for SMM, we update it in our sum-of-parts valuation for SCI, whose fair value now drops from S$4.31 to S$4.03. Maintain BUY.

Unfazed by volatile stock market; continues to expand
The stock market, including SCI’s stock, has been relatively volatile; SCI’s share price dropped by about 34% from its 21 Apr peak to as low as S$3.08 on 24 Aug, before recovering ~14% to its current level. However, it is still business as usual for SCI. In fact it has been expanding its operations, with the groundbreaking of its seventh Vietnam Singapore Industrial Park (VSIP) on 16 Sep and the commencement of full commercial operations for the second 660MW unit in its Indian power project, Thermal Powertech Corporation India (TPCIL). 

Develops 7th VSIP project in Vietnam
The first VSIP was established in 1996 in Binh Duong province near Ho Chi Minh City, and about 20 years later SCI is now developing its seventh VSIP project (VSIP Nghe An). VSIP has attracted US$7.9b in total investment capital from over 583 companies in Vietnam, and the total gross area of the seven developments (including phase one of VSIP Nghe An) is 6,153ha. 

Completion of SCI’s first coal-fired power plant in India
Another significant development is the recent commencement of full commercial operations for the second 660MW unit in TPCIL. The ~US$1.5b coal-fired power plant investment (total capacity 1,320MW) has been operating steadily since Apr 2015 after completion of its first 660MW unit. 

Utilities underappreciated; stub trading at about 7x P/E
The implied utilities stub is trading at about 7x P/E, close to one s.d below its historical average. Considering that utilities is a less cyclical industry (and a growing one for the overseas segment due to rising emerging market demand), as well as SCI’s demonstration of its capabilities in developing and executing large-scale greenfield projects over the years, we believe that the utilities segment has been underappreciated. Meanwhile, as we recently lowered our fair value estimate for SMM, we update it in our sum-of-parts valuation for SCI, whose fair value now drops from S$4.31 to S$4.03. Maintain BUY.

Sembcorp Industries

UOBKayhian on 5 Aug 2015

FY15F PE (x): 8.4
FY16F PE (x): 8.3

Results were within our expectation. Sembcorp Industries (SCI) reported a net profit of S$366m in 1H15, 48% of our 2015 forecast. The profit included an exceptional gain of S$54.6m arising from the disposal of its UK municipal water operations in 2Q15. Management had earlier flagged it in their 1Q15 results. 2Q15 net profit was S$224m. Excluding the exceptional gain, net profit would have been S$169m, which was higher than 1Q15's net profit of S$142m. Overseas power utilities to expand 25% in 2015. Sembcorp is expected to expand its effective power generation capacity by 25%, 24% and 14% yoy in 2015-17 respectively. India dominates in SCI’s capacity expansion. Projects in the 2015 pipeline include (on a gross capacity basis) 120MW of wind assets from Green Infra and 1,320MW from the TPCIL in India, and 300MW from the Chongqing power plant (pending approval). Target price is also tweaked marginally from S$5.10 to S$5.00, based on sum-of-theparts valuation. We factor in our marginally revised target price of S$2.91 for SMM and value SCI’s utilities business at 12x 2016F PE. Maintain BUY.

Sembcorp Industries

OCBC on 5 Aug 2015

Sembcorp Industries (SCI) reported a 5.8% YoY drop in revenue to S$2.4b but a 24.9% increase in net profit to S$223.6m in 2Q15, such that 1H15 net profit accounted for 50% of our full year estimate. In 2Q15, the utilities segment was boosted by better performance in the solid waste division with favourable contract renewals, bringing net profit for Singapore utilities to S$36.4m in the quarter, compared to S$30.9m in 1Q15. The main drag was still the marine division. Looking ahead, intense competition in the power market is likely to persist, and low oil prices also mean that the marine division may continue to be a drag. However, we believe that these concerns have already been priced in. Meanwhile, an interim dividend of S$0.05/share has been declared, same as last year. Updating our sum-of-parts valuation with a lower fair value estimate of Sembcorp Marine, our fair value for SCI drops from S$4.40 to S$4.31. Maintain BUY.

2Q15 results within expectations
Sembcorp Industries (SCI) reported a 5.8% YoY drop in revenue to S$2.4b but a 24.9% increase in net profit to S$223.6m in 2Q15, such that 1H15 net profit accounted for 50% of our full year estimate. Stripping out one-off items such as disposal gains (S$54.7m gain on disposal of Sembcorp Bournemouth Water Investment) and fair value losses on financial instruments, we estimate core PATMI to be around S$191m, still within expectations. 

Better sequential performance in Singapore utilities
As mentioned in our earlier report, SCI’s Singapore utilities business is more than the power business; the natural gas, water and solid waste treatment and management segments are also important contributors. Indeed, in 2Q15, the utilities segment was boosted by better performance in the solid waste division with favourable contract renewals, bringing net profit for Singapore utilities to S$36.4m in the quarter, compared to S$30.9m in 1Q15.

Overseas utilities and urban devt also better
As for overseas utilities, net profit was also higher at S$60.6m vs $50.1m in 1Q15. The first unit of the TPCIL power plant in India commenced operation in 1Q15, and the plant will be in full operation by 3Q15. In the urban development segment, net profit increased to S$11.9m in 2Q15 due to higher contribution from the Nanjing and Chengdu projects in China.

Negatives priced in; look beyond current volatility
Looking ahead, intense competition in the power market is likely to persist, and low oil prices also mean that the marine division may continue to be a drag. However, we believe that these concerns have already been priced in. Meanwhile, an interim dividend of S$0.05/share has been declared, same as last year. Updating our sum-of-parts valuation with a lower fair value estimate of Sembcorp Marine, our fair value for SCI drops from S$4.40 to S$4.31. Maintain BUY.

Sembcorp Industries

OCBC on 24 Jun 2015

Since our downgrade to Hold in early May, SCI’s stock price has corrected ~14% to settle near its 52-week low of S$3.87, likely due to 1) more downbeat guidance by management regarding the local power business, as well as 2) later-than-expected earnings contribution of the Indian plant (TPCIL). Poor sentiment on SembMarine’s stock probably also weighed on its parent’s stock as well. Though the group is currently facing headwinds, we remain sanguine about its prospects over the longer term, given its pipeline of projects in developing countries where demand for utilities is expected to grow. At ~9.4x forward P/E and 1.2x P/B, valuations are undemanding. As concerns on the stock have already been well-flagged by the market, and we now see a ~16% upside potential (includes 4.1% forecasted dividend yield) from our revised fair value estimate of S$4.40 (prev. S$4.72), we upgrade our rating to BUY.

Share price has corrected 18% from peak
Since our downgrade to Hold in early May, SCI’s stock price has corrected ~14% to settle near its 52-week low of S$3.87. This is also 18% from its recent peak. We believe that the main reasons for this weak share price performance was due to 1) more downbeat guidance by management regarding the local power business, as well as 2) later-than-expected earnings contribution of the Indian plant (TPCIL). Poor sentiment on SembMarine’s stock probably also weighed on its parent’s stock as well.

Not just the power business in Singapore
We remain concerned about the challenging operating environment of the local power business, given the capacity expansion in the industry, but we also note that this segment accounted for only a fifth of the Singapore utilities net profit in FY14, with the rest coming from the natural gas, water and solid waste treatment and management segments. In total, Singapore utilities accounted for about half of total utilities in FY14, and the rest is from overseas assets. We still expect steady growth from the overseas business.

Undemanding valuations; look beyond current headwinds
Though SCI is currently facing headwinds, we remain sanguine about longer term prospects, given the pipeline of projects in developing countries where utilities demand is expected to grow. We believe SCI’s proven track record in identifying, securing, financing and executing projects puts it in good stead for more to come. Currently, the stock is currently trading at ~9.4x forward P/E, (greater than 1 s.d. below its 5-year historical average) and 1.2x P/B, a historical low.

Upgrade to BUY; FV S$4.40
We lower our P/E for the utilities business from 11x to 10x due to the dimmer outlook of the domestic power segment which remains competitive, and we are also cognizant of lower vesting levels that would affect earnings in this segment. These concerns have, however, been well-flagged by the market, and with the recent price correction, we now see a ~16% upside potential (includes 4.1% forecasted dividend yield) from our revised fair value estimate of S$4.40 (prev. S$4.72), we upgrade our rating to BUY.

Sembcorp Industries

OCBC on 8 May 2015

Sembcorp Industries (SCI) posted a 11.0% YoY drop in revenue to S$2.3b and a 23.1% drop in net profit to S$142.2m in 1Q15, slightly below our expectations. 2015 is expected to be challenging for the Singapore energy business, but the overseas business is expected to continue to deliver a steady performance. On the marine side, new orders remain minimal. After our rating upgrade on 18 Feb, SCI’s stock appreciated by ~16% to close at S$4.86 on 21 Apr, but has since retreated to S$4.49 vs 17 Feb’s close of S$4.20. We roll forward our valuations, and with a lower fair value estimate for Sembcorp Marine in our SOTP valuation, we lower our fair value estimate from S$4.84 to S$4.72. Downgrade to HOLD, with a potential upside of 8.6% (this includes a dividend yield of ~3.6%).

1Q15 results slightly below

Sembcorp Industries (SCI) posted a 11.0% YoY drop in revenue to S$2.3b and a 23.1% drop in net profit to S$142.2m in 1Q15, accounting for 22% and 18% of our full year estimates, respectively. This was slightly below our expectations due to higher depreciation from the Banyan cogen plant in the power segment, as well as lower spark spreads. Though we are expecting 2H15 to be a stronger period for the group with more significant earnings contributions from the start-up of TPCIL in India and some cost reductions from group-wide initiatives, we pare our FY15/16 estimates by 5/7%, due to lower forecasts for the marine business, as well as lower estimates for the Singapore utilities business.

Overseas utilities the bright spot for now
2015 is expected to be challenging for the Singapore energy business with continued intense competition in the power market as well as low oil prices. The overseas business, however, is expected to continue to deliver a steady performance. On the marine side, new orders remain minimal and we have already lowered our fair value estimate for Sembcorp Marine (SMM) from S$2.95 to S$2.77. Uncertainties in Brazil’s oil and gas industry remain and SMM is exploring all options including slowing down the construction of the drillships. Meanwhile, the urban development segment is expected to deliver a performance comparable to 2014, though quarterly earnings are likely to be lumpy due to land sales recognitions. 

Downgrade to HOLD
After our rating upgrade on 18 Feb, SCI’s stock appreciated by ~16% to close at S$4.86 on 21 Apr, but has since retreated to S$4.49 vs 17 Feb’s close of S$4.20. We roll forward our valuations, and with a lower fair value estimate for Sembcorp Marine in our SOTP valuation, we lower our fair value estimate from S$4.84 to S$4.72. At the current price level, we downgrade our rating from Buy to HOLD, with a potential upside of 8.6% (this includes a dividend yield of ~3.6%).

Sembcorp Industries

UOBKayhian on 8 May 2015

FY15F PE (x): 10.5
FY16F PE (x): 10.6

Results were below expectations. Sembcorp Industries (SCI) reported 1Q15 net profit of S$142m (-23% yoy), which was 18% of our forecast of S$790m for 2015. Earnings were 10% below our expectation. The utilities segment posted a net profit of S$74.5m (- 19% yoy), while the marine segment delivered a net profit of S$65m (-13% yoy). These two segments account for 98% of group net profit. Target price tweaked marginally from S$5.20 to S$5.10, based on sum-of-the parts valuation of S$5.08/share. We factor in our target price S$2.92 for SMM and value SCI’s utilities business at 12x 2016F PE. Maintain BUY

Sembcorp Industries

Kim Eng on 8 May 2015

• 1Q15 missed. Weak on all fronts. Cut FY15-17 by 5-9%. 
• India TPCIL ramp-up slower than expected. New Myanmar power plant to contribute only from 2017. 
• SOTP TP drops from SGD4.16 to SGD4.05. Maintain HOLD for lack of catalysts. 

Weak on all fronts
1Q15 PATMI of SGD142.2m (-23.1% YoY, +40.9% QoQ) missed, at only 17%/18% of our/market’s FY15. Marine disappointed on weak ship repair, as already indicated by SMM’s results on 28 Apr. Intense competition in the power market lopped 42% YoY off Singapore utilities’ net profit, to SGD30.9m. TPCIL did not contribute in 1Q15. Its recently-acquired wind-power asset, Green Infra, in fact booked a SGD1.6m loss from the low wind season which occurs in Oct-Apr. Management said Green Infra usually delivers 75% of its earnings during the high wind season. SCI also suffered from higher depreciation charges for these new assets.

No catalysts yet
We expect Singapore power plants’ as spark spreads slipped further in 1Q15. TPCIL’s ramp-up in India was also slower than expected. While its first 660MW unit was hooked up with the grid in 1Q15, it was shut for rectification work and restarted only on 11 Apr. TPCIL’s unit 2 will be commissioned at end-3Q15 but may take several months to rev up. We see contributions only from 2016. Elsewhere, SCI will be developing and operating a USD300m, 225MW gas-fired power plant in Myanmar. But commercial operations will only commence in 2017. We cut FY15-17 EPS by 5-9% as we factor in weaker Marine and Singapore Utilities. We also account for a SGD50m divestment gain related to Sembcorp Bournemouth Water in the UK in 2Q15. Our SOTP TP drops from SGD4.16 to SGD4.05. Expect any positive catalysts from overseas projects only from 2016. Maintain HOLD.

Sembcorp Industries Ltd

UOBKayhian on 18 Feb 2015

FY15F PE (x): 9.4
FY16F PE (x): 8.7

Above expectations. Sembcorp Industries (SCI) posted a net profit of S$241m and S$801m for 4Q14 and 2014 respectively. 2014’s net profit was 4% of our forecast of S$772m. We attribute this to better-than-expected marine earnings. Marine operating margin was sharply higher at 16.1% vs 10.0% in 3Q14 and 11.1% in 4Q13. This was due to repeat orders and greater efficiency. Excluding a net exceptional gain of S$69m from 2013’s earnings, utilities net profit grew by 7% from S$381m in 2013 to S$408m in 2014. The net exceptional gain in 2013 was due to a S$117.1m gain from the Salalah IPO and net of S$48.5m impairment from UK Teeside. Powering ahead. SCI will continue to power ahead with 3,000MW (+76%) of power and close to 1.5m m3/day (+21%) of water and wastewater treatment capacities which will come on stream in 2014-16. The largest capacity additions are two power plants – totaling 2,640MW in India. SCI’s Banyan Cogen (Singapore) is completed and in operation. TPCIL’s (India) first 660MW unit is currently pre-commissioning with commercial operations to have occurred at end-14. NCCPP (India) and Fujairah 1 desalination expansion (UAE) are more than half complete. Maintain BUY and target price of S$5.20 which is pegged to our revised SOTP valuation. We value SCI’s utilities business at 2016F PE of 12x 2016F PE and SMM at S$2.93/share (based on 2016F PE of 9.5x, assuming Brent oil price at US$70/bbl). We maintain our BUY call.

Sembcorp Industries

OCBC on 18 Feb 2015

Sembcorp Industries (SCI) posted a 10.4% YoY drop in revenue to S$2.7b and a 7.5% rise in net profit to S$240.6m in 4Q14, such that FY14 net profit of S$801.1m (-2%) was 4% higher than our full year estimate; within our expectations. Excluding one-off items in FY13, SCI achieved a 3% net profit growth in FY14. Management expects the utilities environment to remain challenging but is optimistic about overseas growth. After fine-tuning our estimates and taking into account our lower fair value estimate for Sembcorp Marine, our fair value for SCI drops from S$5.00 to S$4.84. However, as SCI’s share price has corrected since our last report, there is now an upside potential of 19% (includes 3.8% dividend yield). Hence we upgrade our rating to BUY. A final dividend of S$0.11/share is payable on 18 May 2015.

FY14 results in line
Sembcorp Industries (SCI) posted a 10.4% YoY drop in revenue to S$2.7b and a 7.5% rise in net profit to S$240.6m in 4Q14, such that FY14 net profit of S$801.1m (-2%) was 4% higher than our full year estimate; within our expectations. For the full year, net profit from the utilities business fell 9% to S$408.0m, while marine saw a 1% rise to S$340.0m. Urban development registered a 12% drop in net profit to S$8.9m. Net profit in FY14 decreased mainly because FY13 included the gains from the IPO of Salalah, offset by impairments for Teesside in the UK. Excluding these items, SCI achieved a 3% net profit growth in FY14. 

Utilities – seeking growth overseas
Management expects the utilities environment in Singapore to be challenging this year with intense competition in the power market as well as low oil prices. This is significant as Singapore accounted for 53% of utilities’ net profit in FY14. The picture looks brighter overseas, as SCI’s 1,320 MW power plant in India will commence operations in phases this year. The group is also seeking to expand its footprint in India, as seen by its recent S$232.5m acquisition of a 60% stake in Green Infra Ltd which owns 665 MW of wind and 35 MW of solar assets in operation and under development in India.

Final dividend of S$0.11/share
SCI has proposed a final dividend of S$0.11/share (payable 18 May 2015), bringing the full year dividend to S$0.16/share with a payout ratio of 36%. In FY13, the group paid a final dividend of S$0.15 and a special dividend of S$0.02 with no interim dividend.

Share price has corrected; upgrade to BUY
After fine-tuning our estimates and taking into account our lower fair value estimate for Sembcorp Marine, our SOTP-based fair value for SCI drops from S$5.00 to S$4.84. However, as SCI’s share price has fallen by ~10% since our last report, there is now an upside potential of 19% (includes 3.8% dividend yield). Hence we upgrade our rating to BUY.

Regional Oil & Gas

UOBKayhian on 27 Nov 2014

Fund managers were receptive to our views that:
• Asia is cost competitive in oil & gas (O&G) production given that it is a shallow and
midwater exploration & production (E&P) region. In the case of Southeast Asia, the cost
breakeven – in terms of Brent oil price – is US$30-40/bbl.
• Asia’s spending is driven by national oil companies (NOC) instead of international oil
companies (IOC). NOCs’ goal is to maintain/achieve self-sufficiency while IOCs
maximise profits and shareholder returns. Thus, NOCs’ spending is typically more
resilient than that of IOCs. As a whole, Asia accounts for 33% of global oil demand but
only 9% of production.
• Rising cabotage in Asia (and in key oil producer markets around the world) has
changed the competitive landscape. Each cabotage market has its own demand-supply
dynamics than may not mirror the global market.
Stock differentiation has become even more crucial. We continue to advocate a bottomup
strategy that favours companies with: a) an experienced and dynamic management,
b) a resilient business positioned in regional shallow and mid-water depths or a
cabotage market that has high barriers to entry, c) a clearly defined company-driven
growth, d) good profit margins to cushion a potential industry downturn, e) cash calls
that are strategic and EPS-accretive, and f) a healthy ROE. We believe investors will
return to stocks that deliver earnings growth amid lower oil prices.
Singapore: We like stocks that provide relative earnings resilience as well as earnings
growth. Our top picks are: Ezion (EZI SP/Target price: S$2.18), Pacific Radiance
(PACRA SP/ Target price: S$1.57), Triyards (ETL SP/ Target price: S$1.13) and
Sembcorp Industries (SCI SP/ Target price: S$5.80). 

Sembcorp Industries

UOBKayhian on 7 Nov 2014

FY14F PE (x): 10.9
FY15F PE (x): 10.5

Prior year period distorted by exceptional gains. Sembcorp Industries (SCI) posted net
profit of S$196m and S$560m for 3Q14 and 9M14 respectively. 9M14 net profit was
70% of our full-year forecast of S$800m. The utilities business net profit for 3Q14 and
9M14 decreased in 3Q13 and 9M13 when it included a gain from the IPO of Salalah,
which was offset by an impairment the combined effect was a net gain of S$69m made
for the operations on Teeside in the UK. Excluding these significant items, the utilities
business achieved a 10% net profit growth in 3Q14 from S$103m in 3Q13 but net profit
was slightly lower in 9M14 compared to 9M13’s S$305m.

Target price is lowered from S$5.95 to S$5.80 which is pegged to our revised sum-ofthe-
parts valuation. We value SCI’s utilities segment at 12x 2015F PE. We maintain our
BUY call.

Sembcorp Industries

Kim Eng on 7 Nov 2014

• 3Q14 below due to Marine’s underperformance. Cut FY14E-16E EPS by 1-6%.
• Utilities’ domestic-power business weak. Pending offset from new overseas projects.
• Maintain HOLD with SOTP TP cut from SGD5.03 to SGD4.75 after updating components.

Marine weakness; Utilities in line
3Q14 PATMI of SGD196.6m, down 22.7% YoY but up 9.8% QoQ, was below expectations due to SMM’s underperformance. Adjusting for one-offs of SGD68.6m last year, 9M14 PATMI rose 6.1% YoY to SGD560.5m. This forms 67% of our FY14E forecast and 70% of the market’s. Management guides for steady core Utilities earnings in FY14.

Focus on overseas pipeline
SCI’s power business in Singapore remains under pressure from low spark spreads. These were down 3% QoQ and 33% YoY from intense competition from new capacity. Its 1,320MW TPCIL power plant in India should help to lift Utilities profits next year once it starts operating.
SCI continues to focus on executing and acquiring new overseas projects to diversify its exposure. It recently signed a conditional agreement to collaborate on a 1,620MW mine-mouth coal-fired power project in Chongqing, China. We believe more significant growth could materialise only from FY16, with the proper ramp-up of a few other projects.

We cut FY14E-16E EPS by 1-6% as we factor in SMM forecasts. Our SOTP-based TP falls to SGD4.75 from SGD5.03 as we update its components. Maintain HOLD. We could turn more positive on: 1) better Marine execution and order wins; 2) a stronger Utilities from earlier/more overseas projects; and 3) higher spark spreads.

Sembcorp Industries

OCBC on 7 Nov 2014

Sembcorp Industries (SCI) posted a 3.2% YoY rise in revenue to S$3.1b and a 22.7% YoY fall in net profit to S$196.6m in 3Q14, such that 9M14 net profit of S$298.6m accounted for 73% and 71% of ours and the street’s full year estimates, respectively. Spark spreads in Singapore continued to remain under pressure in the quarter and were lower by 3% QoQ and 33% YoY in 3Q14. Competition in the Singapore power market “continues to be intense” and is expected to affect the performance of the utilities business. However, overseas operations are expected to grow. Meanwhile, with the consolidation of TPCIL as well as higher borrowings from the marine segment, SCI’s balance sheet has become more leveraged. After taking into account SMM’s lower fair value since our last update, as well as SCI’s net debt position, our SOTP-based fair value estimate drops from S$5.64 to S$5.00. Maintain HOLD.

Results within expectations
Sembcorp Industries (SCI) posted a 3.2% YoY rise in revenue to S$3.1b and a 22.7% YoY fall in net profit to S$196.6m in 3Q14, such that 9M14 net profit of S$298.6m accounted for 73% and 71% of ours and the street’s full year estimates, respectively. Net profit from the utilities business fell 34% YoY to S$114.2m, while marine saw a 2% rise to S$80.0m in the quarter. Meanwhile, urban development saw a 114% rise in net profit to S$4.9m. The fall in net profit for utilities for 3Q14 was mainly because 3Q13 saw gains from the IPO of Salalah, offset by an impairment made for operations in the UK; excluding these one-off items, SCI achieved a 10% net profit growth in the utilities segment in 3Q14. 

Spark spreads remain under pressure
Spark spreads in Singapore continued to remain under pressure in the quarter and were lower by 3% QoQ and 33% YoY in 3Q14. Competition in the Singapore power market “continues to be intense” and is expected to affect the performance of the utilities business. However, overseas operations, which accounted for about half of utilities net profit in 9M14, are expected to grow. As for the urban development business, it is expected to deliver a comparable performance in 2014, underpinned by land sales in China and Vietnam.

Maintain HOLD
With the consolidation of TPCIL (SCI’s first power plant investment in India) which became a subsidiary in Jul 2014, as well as higher borrowings from the marine segment, SCI’s balance sheet has become more leveraged; at 3Q14 the group was in a net debt position of S$2.3b vs. just S$49m in 2Q14. We do note, however, that about 43% of its total debt is long-dated and repayable after five years. We also expect more cash inflows as more plants come on-stream. After taking into account SMM’s lower fair value since our last update, as well as SCI’s net debt position, our SOTP-based fair value estimate drops from S$5.64 to S$5.00. Maintain HOLD.

Sembcorp Marine

OCBC on 6 Nov 2014

Sembcorp Marine (SMM) reported a 3.2% YoY rise in revenue to S$1.7b and a 1.8% increase in net profit to S$132m in 3Q14, such that 9M14 revenue and net profit accounted for 75% and 68% of our full year estimates, respectively. 3Q14 margins were lower as procurement revenue from two additional drillships (which started revenue recognition in 3Q14) was recognized in the quarter; we expect 4Q14 to be stronger with the completion of several projects. As SMM enters the critical phase of completing its first drillship in the new Brazil yard, we believe this is likely to the focus in 4Q14 as well. Meanwhile management remains optimistic in terms of new order outlook, especially from production-related work such as FPSOs and fixed platforms. Maintain BUY with S$4.18 fair value estimate.

Lower margins in 3Q14 with more procurement revenue
Sembcorp Marine (SMM) reported a 3.2% YoY rise in revenue to S$1.7b and a 1.8% increase in net profit to S$132m in 3Q14, such that 9M14 revenue and net profit accounted for 75% and 68% of our full year estimates, respectively. Though operating margin of 10% in 3Q14 was similar to that in 3Q13, it was lower than the 11.5% seen in 2Q14, and this was mainly because procurement revenue from two additional drillships (which started revenue recognition in 3Q14) was recognized in the quarter, dragging down overall margins. We expect 4Q14 to be a stronger quarter due to the completion of several projects, including three jack-up rigs, the semi-sub accommodation rig for Prosafe, and the onshore module for an LNG facility.

Updates on drillships – all on track
Four drillship units contributed to revenue in 3Q14, with the 1st unit (Jun 2015 delivery) being more than 75% recognized, more than 50% for the 2nd(Aug 2016 delivery), more than 20% for the 3rd (Dec 2016 delivery), and about 14% for the 4th (Aug 2017 delivery). The official delivery date for the 1st drillship is 30 Jun 2015, along with a month’s grace period. 

Brazil yard- commenced initial operations
According to management, construction at the Brazil yard is progressing well. There are slightly more than 900 people at the yard currently, and these are all under SMM’s direct headcount (none from sub-contractors). SMM envisions that this number will rise to about 2500-3000 people at steady state. As SMM enters the critical phase of completing its first drillship in the new Brazil yard, we believe this is likely to the focus in 4Q14 as well.

Still getting “healthy enquiries”
Currently, SMM has a net order book of S$12.6b with deliveries till 2019, and management remains optimistic in terms of new order outlook, especially from production-related work such as FPSOs and fixed platforms. In particular, the group looks forward to executing more FPSO-related work with its enhanced yard capacity in Tuas. Maintain BUY with S$4.18 fair value estimate.

Sembcorp Industries

Kim Eng on 7 Aug 2014

• 2Q14 PATMI met expectations. Interim DPS of 5.0 SGD cts.
• Utilities suppressed by low spark spread in domestic market. Overseas contributions grew.
• Maintain HOLD in view of near-term domestic power price pressure. SOTP-based TP trimmed from SGD5.11 to SGD5.03 after updating components.

Results in line
2Q14 PATMI of SGD179.0m (+8.3% YoY, -3.1% QoQ) lifted 1H14 PATMI by 6% YoY to SGD363.9m. This formed about 45% of our FY14E and consensus forecasts. We expect a stronger 2H with maiden contributions from its new Banyan cogen plant (started in July) and the recognition of more rig-building contracts by Marine. SCI declared an interim dividend for the first time, of 5.0 SGD cts. We keep our FY14E DPS of 15.0 SGD cts.
Focusing on overseas pipeline
Domestic power operations remained suppressed by low spark spreads, which fell 30% YoY (1Q14: -28% YoY), due to intense competition. Overseas operations mitigated the weakness, accounting for 48% of Utilities net profit in 1H14, up from 41% in 1H13. While management believes that spark spreads have stabilised, it said there could be further price pressure from 2015 as the Vesting Contract Level (used to mitigate the pricing power of gencos) could fall from 40% to 16% after the Energy Market Authority’s review.
SCI intends to focus on its overseas projects to offset the domestic market pressure. Over 3,000MW of new power capacity and 1.7m m3/day of new water capacity should come onstream in 2014-16.
Our forecasts are largely intact. TP trimmed to SGD5.03 from SGD5.11 as we update SOTP components. Maintain HOLD.

Sembcorp Industries

UOBKayhian on 7 Aug 2014

2Q14’s utilities net profit declined by 17% yoy as Singapore utilities earnings fell by 33%
on lower spark spread on the back of intense competition. Notwithstanding this, SCI is
powering ahead with large power projects – especially in India – which will come onstream
in 2014-16. An interim DPS of 5 S cents has been declared. We cut our 2014-16
earnings forecasts by 7%, but maintain BUY. Target price: S$5.95.

Powering ahead. SCI will continue to power ahead with 3,000MW (+76%) of power and
close to 1.5m m3/day (+21%) of water and wastewater treatment capacities which will
come on-stream in 2014-16. The largest capacity additions are two power plants –
totaling 2,640MW – in India. SCI’s Banyan Cogen (Singapore) is completed and in
operation. TPCIL (India)’s first 660MW unit is currently pre-commissioning with
commercial operations expected end-14. NCCPP (India) is 46% complete while
Fujairah 1 desalination expansion (UAE) is 57% complete.

Sembcorp Industries

OCBC on 7 May 2014

Sembcorp Industries (SCI) posted an 11.8% YoY rise in revenue to S$2.63b and a 4.5% YoY increase in net profit to S$184.8m in 1Q14, within our expectations. Though competition in the Singapore power market remains intense, the group expects its utilities segment to deliver a steady performance compared to last year. Going forward, SCI’s pipeline of projects is expected to increase its power capacity by more than 70% and its water and wastewater treatment capacity by more than 20% over the next three years, enhancing recurring earnings. We also await more details on the “revival” of SCI’s property development subsidiary, which we see synergies with the industrial park business. Meanwhile, with the lowering of SembMarine’s fair value (from S$5.26 to S$4.90), our SOTP-based fair value also slips from S$6.42 to S$6.17. Maintain BUY.

1Q14 results in line
Sembcorp Industries (SCI) posted an 11.8% YoY rise in revenue to S$2.63b and a 4.5% YoY increase in net profit to S$184.8m in 1Q14, accounting for 22% and 23% of our full year estimates, respectively. There were no material one-offs in the last quarter and the results were within our expectations. Net profit from the utilities business rose 3% to S$91.6m, while marine saw a similar rise in percentage to S$74.3m in the quarter. Urban development was the outperformer, with a 192% rise in net profit to S$19.5m, due to strong contributions from the Nanjing Eco Hi-tech project in China.

Increasing capacity over the next three years
Competition in the Singapore power market “continues to be intense”, but management points out that power generation is just one of several income components in Singapore, with the rest coming from the co-gen plant and supply of on-site facilities like steam and piped natural gas. Overall, the group expects the underlying core business of its utilities segment to deliver a steady performance compared to last year. Going forward, SCI’s pipeline of projects is expected to increase its power capacity by more than 70% and its water and wastewater treatment capacity by more than 20% over the next three years, enhancing recurring earnings.

Awaiting more details on property “revival”
We await more details on the “revival” of SCI’s property development subsidiary, which we see synergies with the industrial park business. Though no plans have been officially approved yet, we could start seeing some developments as early as 2H14. Meanwhile, with the lowering of SembMarine’s fair value (from S$5.26 to S$4.90), our SOTP-based fair value also slips from S$6.42 to S$6.17. Maintain BUY.

Sembcorp Industries

UOBKayhian on 7 May 2014

FY14F PE (x): 11.1
FY15F PE (x): 10.6
21% of our 2014 net profit forecast. Sembcorp Industries (SCI) reported a net profit of
S$185m (+5% yoy) for 1Q14. This was 21.4% of our 2014 forecast. The utilities
segment registered a 3% yoy increase in net profit to S$92m, primarily due to strong
performance in China (+33% yoy). Singapore’s flat utilities earnings were a
commendable performance, in view of competition from new power plants in the
industry. The lower utilities earnings contributions from the Middle East & Africa region
was due to SCI’s reduced stake in Salalah in Oman from 60% to 40%, following the
latter’s IPO in 4Q13. Maintain target price at S$5.95, pegged at 10% discount to our
sum-of-the-parts valuation. We value SCI’s utilities segment at 12x 2015F PE.

Sembcorp Industries

Kim Eng on 7 May 2014

• 1Q14 PATMI of SGD184.8m (+4.5% YoY, -17.4% QoQ) disappointed due to Sembcorp Marine’s weaker performance.
• Utilities segment PATMI of SGD91.6m (+2.5% YoY) was in line, with strong contribution from China (SGD16.7m, +33% YoY).
• Maintain HOLD with lower SOTP-based TP of SGD5.31.

What’s New
Sembcorp Industries (SCI) reported lower-than-expected results for 1Q14, with PATMI of SGD184.8m (+4.5% YoY, -17.4% QoQ) making up 21% and 22% of our initial and consensus full-year forecasts. This came on the heels of Sembcorp Marine’s (SMM) disappointing performance. The utilities segment, however, measured up to expectations, posting PATMI of SGD91.6m (+2.5% YoY, +20.2% QoQ), which made up 23% of our initial full-year forecast. This was supported by a 33% YoY increase in contribution from China operations despite stagnant growth in Singapore operations.

What’s Our View
By 2016 SCI’s utilities development pipeline would see its gross power capacity increase by 76% to 7,300MW, while water capacity is expected to rise by 21% to 8.6m m3/day. These additions are critical in driving future growth as power price pressure in Singapore mounts. Spark spread fell by 23% QoQ, which would cap the growth in its domestic power operations despite new capacity addition.
Urban deve
lopment PATMI surged 192% YoY in 1Q14 to SGD19.5m due to strong land sales in Nanjing Eco Hi-tech Island project in China. The segment is expected to deliver better performance this year in anticipation of land sales in China and Vietnam.
We lower our FY14E/15E/16E PATMI by 7%/7%/11% to factor in our earnings cuts for SMM. Our SOTP-based TP thus falls to SGD5.31 (from SGD5.51). Maintain HOLD.

Sembcorp Industries

Kim Eng on 27 Feb 2014

No major surprises in 4Q13 results
Sembcorp Industries’ (SCI) 4Q13 PATMI of SGD223.8m (+9.3% YoY, -12.0% QoQ) met expectations, after stripping out the SGD39.6m tax credit (mainly from the Marine segment). Utilities net profit dipped in 4Q13 (-6.2% YoY, -55.8% QoQ) due to: 1) lower electricity sales and HSFO prices in Singapore, and 2) scheduled maintenance in two of its China plants. SCI declared a final DPS of 17 cents.

What’s Our View
SCI communicated a shift in its Utilities business strategy to one skewed towards the developer model as opposed to an owner-operator model. SCI intends to take a higher stake upfront as a developer in future projects and pare down its stake after project completion. We believe that this would allow it reap a portion of return upfront while still participate in long-term recurring income of utilities project (eg. the Sembcorp Salalah IPO)
SCI did not provide an indication of the extent of domestic power spread decline for 4Q13 (which dipped ~19% YoY in 3Q13), but suggested that some players are contemplating to scale back on capacity expansion to defend industry profitability. This could provide some relief to an expected decline in power prices in FY14E. Nevertheless, we believe that the key upside for the SCI still lies in its pipeline of Utilities development projects.
Our forecasts and SOTP-based TP are left largely unchanged. Maintain Hold on concerns on power spread decline in Singapore.