Sembcorp Industries Ltd - 3Q15 dragged by Marine; decent overseas growth for Utilities

9M15 net income down 13% yoy at S$488m
SCI's 3Q15 net income was down 38% yoy to S$122m while 9M15 net income declined 13% to S$488m and was generally in line with our expectations (71% of our FY15E and 66% of consensus). Utilities net income was down 21% yoy to S$90m in 3Q15. Urban Development 3Q15 net profit was down 7% yoy to S$5m and Marine net income declined by 75% yoy to S$20m. We have incorporated our latest (reduced) earnings forecasts for SMM and slightly raised our Utilities earnings estimates on higher overseas contribution. Accordingly, our earnings estimates for SCI are modified as shown in Figure 1. We believe current valuations are fair, in light of weak prospects for SMM and intense competition in the Singapore power market; maintaining Hold.

Utilities earnings decline for Singapore in 9M15
SCI's 9M15 utilities net income was up 3% due to gains of S$18m on sale of Zhumadian China Water in Aug-15 and gains of S$55m on sale of Sembcorp Bournemouth Water Investment in Apr-15. Singapore Utilities net income was down 38% to S$99m (S$161m in 9M14) due to lower spark spreads. Within the Singapore net earnings pie, Energy was down 67% yoy to S$35m, Water grew 4% yoy to S$27m, while on-site logistics/solid waste grew 34% yoy to S$38m. Overseas operations contributed 63% of Utilities net profit in 9M14 (48% in 9M14). China's net income was up 36% to S$65m in 9M15. Net earnings from the Americas, UK and Mid East & Africa were up 20-48% yoy. The rest of ASEAN, Australia and India declined 27% yoy to S$33m due to start-up losses at TPCIL but SCI expects it to breakeven for the full year.

Technical Analysis
Daily Chart
Singapore power market prospects should remain challenging
The weakness in Singapore power prices is largely due to industry capacity expanding sharply over the past few years (licensed capacity up 28% since 2012), lower vesting contract levels and the availability of LNG. With vesting contract levels moving down from 40% in 2014 to 30% in 1H15, 25% in 2H15 , and then to 20% in FY2016 (as per EMA's final determination), competition should intensify as more compete in the spot market. While the power market is challenging in Singapore, the group's overseas earnings should progressively contribute over time. In India, the TPCIL power plant commenced full commercial operation in Sep 2015. SCI is also developing its second thermal power project in India (1,320 MW), which is on track for phased completion in 2016. Other projects include the wind power capacity expansion of 150MW in China, 225MW gas-fired Myingyan IPP project in Myanmar, both to be completed in 2017 and 426MW power plant in Bangladesh to be completed by 2018. (Read Report)

Read Related Reports
1) Sembcorp Industries Limited - Utilities on track for turnaround in 2016 by Credit Suisse Asia Pacific Equity Research, published on 30 October 2015

2) Sembcorp Industries - Dragged by Marine by DBS Group Research, published on 30 October 2015

3) Sembcorp Industries - Marine’s drag offsets Utilities’ drive by Maybank Kim Eng Research, published on 30 October 2015

4) Sembcorp Industries - Steadfast in its strategy‏ by OCBC Investment Research, published on 30 October 2015

5) Sembcorp Industries - Can’t Fight The Tidal Pull by RHB Research, published on 30 October 2015

6) Sembcorp Industries - Divestment gains to the rescue by CIMB Research, published on 29 October 2015

Source : Deutsche Bank Markets Research

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