Tuesday 24 February 2015

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.

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