• Core net profit in line
• Utilities performed well
• More plants starting up

3Q16 recurring net profit in line

Sembcorp Industries (SCI) reported a 10.8% YoY drop in revenue to S$2.1b and a 2.9% rise in gross profit in 3Q16; the latter mainly due to higher contribution from Utilities’ India operations in the quarter. However, net profit fell 55.9% YoY to S$53.9m in 3Q16, dragged by S$71.5m of “other expenses”, comprising S$50.1m from impairment of available-for-sale (AFS) financial assets (mainly Gallant Venture and SMM’s assets) as well as S$17.8m mark-tomarket adjustments of foreign currency forward contracts. Excluding such exceptional items, we estimate recurring net profit of about S$99m for 3Q16, such that 9M16’s figure accounted for 79% of our full year estimates, in line with expectations.

Good performance by utilities; more starting up

Utilities performed well in 3Q16 with a 3% YoY rise in turnover to S$1.2b and a 21% increase in net profit. Excluding the divestment of Zhumadian China Water Co that was recognized in 3Q15, Utilities delivered a growth of 50%. Overseas operations in India, China and the Middle East performed better; the TPCIL plant in India had average plant load factor of 80% in 3Q16, improving from 69% in 2Q16.

Looking ahead, the commercial operations date (COD) of unit 3 of the SGPL plant in India is expected to be in 4Q16, while unit 4’s COD is expected to be in early 2017. SGPL is working to secure longterm PPAs, besides the short-term ones that it currently has on hand (~ 1 year). In China, the 1,320MW Chongqing power plant construction is ahead of schedule, and the 1st unit’s COD is expected to be in 4Q16.

Maintain BUY

Marine continues to be a risk for the group, but we like the long-term growth prospects of the utilities segment which has exposure to developing markets. At current levels, the utilities stub is trading at about 0.7x book, which we feel is unjustified for a division that has in the past five years (and also likely in the future) netted ROEs of between 14-22%. Maintain BUY with S$3.07 fair value estimate.

Source: OCBC Research - 28 Oct 2016