• Stripping out the effects of Sembcorp Marine (SGX:S51), 2Q19 net profit of S$98m is above our expectations as energy turned in a profit of S$92m vs. our S$78m forecast.
• India achieved a profit of S$42m as SEIL 1 turned around with a profit of S$30m, helped by stronger PLF of 82% (1Q: 58%) and settlement gain.
• ADD but lower target price to S$2.83 to incorporate recently downgraded Sembcorp Marine. We think market is underappreciating Sembcorp Industries (SGX:U96)’s energy as it trades at 10-year mean.

Sembcorp Marine Disappointed But Results Beat, Thanks to Energy

• We consider Sembcorp Industries (SGX:U96)’s 2Q19 net profit of S$98m as a beat although Sembcorp Marine missed significantly. Recall that Sembcorp Marine reported wider-than-expected loss of S$8.5m recently.
• Sembcorp Industries’ 1H19 net profit of S$191m formed 49%/40% of our and consensus estimates for FY19F. Energy profit of S$92m (+8% q-o-q, +8% y-o-y) was a positive surprise with strength from India, Singapore, China and Rest of the World (Middle East, Bangladesh & Africa).
• Singapore profit was up 44% q-o-q (-17% y-o-y) to S$36m, thanks to stronger blended spark spread as well as import and sale of LNG cargo. The latter could be opportunistic.

India Was Profitable; Core Profit of S$25m With Settlement of S$42m

• India saw a turnaround from S$7m loss in 1Q19 to profit of S$42m in 2Q19. Although this was lifted by SEIL 1’s S$17m net gain from settlement of late payment from a customer, it was offset by provision for credit loss on receivables. Excluding this, core profit would have been S$25m or in line with our S$22m expectation.
• SEIL 1 surprised on the upside as it returned to normalised S$13m-14m per quarter before its turbine shutdown in 4Q18. It registered core net profit of S$13m (excluding the S$17m settlement effects above). Plant load factor (PLF) recovered to 82% in 2Q19 vs. below 60% in the last two quarters.

Could SEIL 2 be in the Black in FY19?

• SEIL 2 was flat q-o-q with a profit of S$1m (1Q19: S$2m) and steady PLF of 84% (1Q: 83%). We believe the weaker q-o-q coal costs helped as indexed imported coal prices dropped 17% q-o-q in addition to the short-term contracts (six to nine months) clinched at higher tariffs in 2H18. 2Q19 spot power prices remained steady at Rs3.36/Kwh.
• We had previously expected S$40m of losses for SEIL 2 but now reduce our expectations to a loss of S$17m given 1H19 profit of S$3m.
• Upside could come from further weakening of coal costs or better PLF. SGI wind’s profit of S$11m was below our S$20m estimate as most of the new capacity was added at end-Jun. 2Q19 operating wind capacity stood at 1,303 MW (up 126 MW q-o-q).

UK Losses Due to Shutdown, China Stronger Wind, New Bangladesh

• The planned shutdown of Teeside operations was well-warned and resulted in a loss of S$6m. UKPR loss was S$12m with the absence of triad payment in 1Q19.
• China profit of S$29m (+92% y-o-y, flat q-o-q) was a positive surprise on the back of stronger wind capacity.
• Rest of the World profit of S$22m (+29% q-o-q, +54% y-o-y) was due to the new Srajgani 4 power plant in Bangladesh.

Strong Interest in Vietnam for Urban Development

• Urban development profit came in at S$11m (+57% q-o-q, -69% y-o-y), in line with expectations. 1H19 profit was S$18m but Sembcorp Industries keeps its guidance of better profit in FY19 vs. FY18 (S$86m), hence we expect a stronger 2H19 as land sales could be lumpy.
• Order book was at a record 504 hectares, to be recognised in the next two to three years. Interest in Vietnam industrial land remained strong.

Energy Growing 11% in FY19F, Earnings Upgrades for FY20-21F Despite Weak SMM

• We up our EPS by 2-3% for FY20-21F but cut FY19F by 5% due to our recent downgrade in Sembcorp Marine (See report: Sembcorp Marine - CGSCIMB 2019-07-30: Throwing In The Towel For Now). The former is to reflect stronger energy (mainly India, China and Rest of the World) as well as stronger land sale in urban development. We think the market is not appreciating the strength in the energy division and may have ignored the y-o-y earnings recovery of +11% in FY19F and +9% in FY20F.
• Our Target Price is based on SOP valuations. See attached PDF report for details.
• Consistent quarterly profit from India could be a key catalyst.

Source: CGS-CIMB Research - 15 Aug 2019