Sembcorp Industries Limited - 2Q15 boosted by divestment gains; close to trough valuation

Sembcorp's 2Q15 underlying net profit was below expectations, driven by weakness in Marine and Utilities. Interim DPS was maintained at S$0.05.

Utilities' net profit of S$142 mn in 2Q15 was boosted by a S$55 mn gain on sale of Bournemouth Water, a debt provision write-back of S$7 mn in China and insurance claims of S$6 mn in the UK. Excluding these one-offs, we estimate 2Q15 underlying Utilities net profit will be S$74 mn, stable from 1Q15 profit of S$75 mn, but below consensus FY15 profit forecast of S$345 mn.

While contribution from its solid waste business in Singapore increased in 2Q15, this was offset by a S$9 mn loss on start-up of TPCIL in India, as well as continued weakness in the Singapore power market.

We reduce our 2015-17E EPS by 4-9%, driven by lower Utilities and Marine estimates. As a result, our target price is reduced to S$3.80 (from S$4.20). We expect valuation support as SCI is trading at 1.1x P/B, close to its 2008-09 lows. Maintain NEUTRAL.

Utilities net profit of S$142 mn in 2Q15 was boosted by a S$55 mn gain on sale of Sembcorp Bournemouth Water Investment (SBWI) in April 2015. China PATMI increased from S$20 mn in 1Q15 to S$25 mn in 2Q15, due to a debt provision write-back of S$7 mn. UK PATMI increased from S$5 mn in 1Q15 to S$10 mn in 2Q15, due to insurance claims of S$6 mn. Excluding these one-offs, we estimate 2Q15 underlying Utilities net profit will be S$74 mn, stable from 1Q15 profit of S$75 mn. PATMI from rest of ASEAN, Australia, India fell to S$9 mn in 2Q15 from S$12 mn in 1Q15, driven mainly by a S$9 mn loss on start-up costs on Phase One of TPCIL. Management noted that the first 660MW plant has ramped up to achieve 90% load factor in June 2015. Green Infra generated a profit of S$4mn in 2Q15, reversing a S$2 mn loss in 1Q15 with an improvement in the wind load in India.

Singapore PATMI increased to S$36 mn in 2Q15 from S$31 mn in 1Q15, due to better performance from its solid waste business. Energy PATMI remained weak at S$13 mn in 2Q15, vs S$12 mn in 1Q15, due to continued intense competition in the power market which has led to lower pool spark spreads and contract retailing prices. At the same time, vesting contract levels have fallen from 40% to 30% in 1H15. As a result, Singapore power was loss-making in 2Q15. We expect Singapore PATMI to be impacted as the vesting contract level falls further to 25% in 2H15 and 20% in 2016.

Urban Development PATMI improved sequentially
Urban Development PATMI increased to S$12 mn in 2Q15 from S$1mn in 1Q15, due to higher contributions from its Nanjing and Chengdu projects. Management expects Urban Development to deliver a performance comparable to 2014, driven by a pipeline of customers in Nanjing and Chengdu, as well as interest for industrial land in Vietnam.

Technical Analysis
Daily Chart
Marine net gearing increases
Marine revenue fell to S$1.21 bn in 2Q15 from S$1.30 bn in 1Q15, as construction of Sete Brasil drillships slowed down. Management noted that some customers are deferring rig delivery due to low demand. In particular, Transocean has requested for two drillships to be delayed by 24 months. As a result, Sembcorp Marine’s net gearing has increased further to 0.51x as of 2Q15 from 0.28x in 1Q15. (Read Report)

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Source : Credit Suisse Asia Pacific Equity Research

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