22 September 2015 Asia Pacific/Singapore Equity Research Conglomerates
Sembcorp Industries Limited (SCIL.SI / SCI SP) Rating (from Neutral) OUTPERFORM* Price (21 Sep 15, S$) 3.57 Target price (S$) (from 3.80) 4.20¹ Upside/downside (%) 17.6 Mkt cap (S$ mn) 6,382 (US$4,539 mn) Enterprise value (S$ mn) 8,760 Number of shares (mn) 1,787.55 Free float (%) 23.8 52-week price range 5.22-3.08 ADTO - 6M (US$ mn) 11.9 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months.
Research Analysts Gerald Wong, CFA 65 6212 3037
[email protected] Shih Haur Hwang 65 6212 3024
[email protected]
UPGRADE RATING
India powering Utilities turnaround ■ Upgrade to OUTPERFORM. We believe Sembcorp’s current share price has incorporated headwinds related to the deterioration in Singapore power spreads and lower Marine orders, but has not captured the strong Utilities earnings growth prospects from start-up of India power assets. ■ India power plants to drive 11% CAGR in Utilities net profit in 2015-17E. With its 1,320 MW TPCIL plant in Andhra Pradesh commencing operations in September, and 1,320 MW NCCPP plant scheduled for completion in 2016, we expect India to contribute close to 20% of Utilities net profit and 10% of Group net profit in 2017E. The coastal location of both plants in southern India where there is a power deficit, as well as security of coal supply, should present superior plant economics. ■ Utilities earnings cuts likely to be reversed. We expect a 15% cut to consensus utilities net profit YTD to be reversed with more long-term PPAs secured for India, as well as a sharp spike in Singapore power prices in July 2015. In our view, key risks would include a weak financial position of Indian JV partners, as well as a further deterioration in Marine balance sheet, which we believe can be supported by Sembcorp Industries’ low corporate debt. ■ Ex-Marine stub trading below book value. We raise our target price to S$4.20, based on an SOTP valuing the ex-Marine stub at 9x P/E, in line with its historical average. On our estimates, the ex-Marine stub is currently trading at a P/B of 0.9x, below its historical average of 1.1x and NJA average of 1.4x. We believe the ex-Marine business is undervalued given its consistent ROE of above 10%, and we expect Sembcorp Industries’ share price to be supported by an attractive dividend yield of 4.5%.
Share price performance 8
Price (LHS)
Rebased Rel (RHS)
120
6
100
4
80
2 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15
60
The price relative chart measures performance against the FTSE STRAITS TIMES IDX which closed at 2879.59 on 18/09/15 On 18/09/15 the spot exchange rate was S$1.4/US$1
Performance over Absolute (%) Relative (%)
1M 9.2 12.3
3M 12M -8.9 -31.1 4.9 -18.2
— —
Financial and valuation metrics Year Revenue (S$ mn) EBITDA (S$ mn) EBIT (S$ mn) Net profit (S$ mn) EPS (CS adj.) (S$) Change from previous EPS (%) Consensus EPS (S$) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%)
12/14A 10,894.7 1,453.7 1,138.9 801.1 0.45 n.a. n.a. -1.9 8.0 4.5 6.5 1.1 15.1 41.6
12/15E 9,349.8 1,441.8 950.4 663.1 0.37 0.5 0.39 -17.1 9.6 4.5 6.1 1.1 11.4 32.1
12/16E 9,924.2 1,550.4 1,047.1 733.1 0.41 5.0 0.39 10.6 8.7 4.5 5.6 1.0 11.8 28.7
12/17E 10,030.4 1,515.5 1,000.8 781.2 0.44 7.0 0.40 6.6 8.2 4.5 5.7 0.9 11.7 25.7
Source: Company data, Credit Suisse estimates.
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do
business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS
BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access
22 September 2015
Focus charts Figure 1: TPCIL and NCCPP in India to drive 11% CAGR in
Figure 2: South India expected to face power deficit in
Utilities net profit in 2015-17E
2015-16E
500
3.3%
4.0%
450
434
408
400
351
350
42
41
0.0%
-0.4%
-2.0%
191
300
2.0%
2.0%
34
383
192
250
-2.1%
202
196
-4.0%
200
-6.0%
150
-8.0%
217
100
159
146
156
2015E
2016E
2017E
50
-10.0%
0
-12.0% 2014A
Singapore
Others
TPCIL
-11.3%
-11.3%
Southern
North-eastern
-14.0%
NCCPP
Western
Eastern
Northern
All India
Source: Company data, Credit Suisse estimates
Source: Central Electricity Authority (India)
Figure 3: Average traded power prices are significantly
Figure 4: Credit Suisse power generation model suggests
higher in south India since 2012
Singapore electricity market close to bottom
INR/kWh
14.00
16000
(MW)
80%
12.00
14000
70%
10.00
12000
60%
10000
50%
8000
40%
6000
30%
4000
20%
2000
10%
8.00
6.00 4.00 2.00 0.00 Jan-09
Aug-09
Mar-10
Oct-10
May-11 Dec-11
Average - India
Jul-12
Feb-13
Average - South India
Sep-13
Apr-14
Nov-14
0
Jun-15
0%
2007
Andhra Pradesh
Source: Indian Energy Exchange
2008
2009
2010
2011
2012
Total Generation Capacity - LHS
2013
2014
2015
Peak demand - LHS
2016
2017
2018
2019
2020
Reserve Margin - RHS
Source: Energy Market Authority, company data, Credit Suisse estimates
Figure 5: Sharp spike in Singapore spot electricity prices
Figure 6: Utilities stub trading below book value despite
in July could boost 2015 Utilities net profit
consistent ROE of above 10%
300 250 200
150 100 50
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15
0
Uniform Singapore Electricity Price ($/MWh) (LHS)
Source: Energy Market Company
Sembcorp Industries Limited (SCIL.SI / SCI SP)
3.5
18.0
3.0
16.0
2.5
14.0
2.0
12.0
1.5
10.0
1.0
8.0
0.5 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14
6.0
P/B
Average P/B
ROE - RHS
Source: Bloomberg, company data, Credit Suisse estimates
2
22 September 2015
India powering Utilities turnaround India power plants to drive growth Sembcorp’s 1,320 MW TPCIL power plant in India commenced full commercial operation in September 2015 following the completion of its second 660 MW unit. Sembcorp also owns a 49% stake in NCC Power Projects, which is building a 1,320 MW coal-fired power plant scheduled for completion in 2016. Both TPCIL and NCCPP are located in Andhra Pradesh, a province in south India. While we believe that India is a well-supplied market in terms of total generation capacity, transmission and distribution constraints impede the supply of high quality power to consumers. This has led to a power supply deficit in southern India, driving up average YTD traded power prices in Andhra Pradesh to Rs4.1/kWh, above the national average of Rs2.8/kWh. TPCIL and NCCPP’s port-based location improves logistics for both imported and domestic coal, thus enhancing fuel security for the plants. In addition, we believe the coal situation in India has improved meaningfully, due to the sharp fall in imported coal prices, as well as progress made in raising coal production in India. Our detailed modelling for both plants suggests that TPCIL could contribute S$41 mn of PATMI in 2016, and NCCPP could contribute S$34 mn of PATMI in 2017.
Sembcorp’s 1,320 MW TPCIL power plant in India commenced full commercial operation in September 2015, while NCCPP is scheduled for completion in 2016
Singapore power market close to bottom Based on data from Energy Market Authority (EMA), capacity addition is expected to slow down after 2015 with the only large capacity addition being Hyflux's Tuaspring power plant which is expected to commence operations in 1Q16. In our view, the impact from Hyflux’s 411 MW might be smaller than expected, as part of the capacity increase will be used for its water desalination plant. We also note that Uniform Singapore Energy Price (USEP) bounced strongly to average S$207/MWh in July 2015, driven by unplanned downtime at some power generation units. This could lead to strong earnings for Singapore power plants in 3Q15. Renegotiation of gas contracts by gencos could drive upside to power spreads in the medium term.
Power generation capacity addition is expected to slow down after 2015 with the only large capacity addition being Hyflux's Tuaspring power plant
Marine re-balancing may take time While we expect newbuild rig demand to remain weak with significant cuts to E&P capex, Sembcorp Marine has been able to support its order book with S$4.8 bn of non-rig orders since 2H14, representing close to 94% of all contracts secured over this period. Our order prospectus suggests the pipeline of potential contracts has not dried up completely, as it could be bidding for three large contracts, including for a newbuild drillship and two production platforms. In our view, the rig replacement cycle is likely to drive medium-term demand for newbuild jackups. In our view, the greatest remaining risk is a further deterioration in Marine balance sheet, due to greater working capital requirements as customers request for delay in delivery for rigs under construction.
In our view, the greatest remaining risk is a further deterioration in Marine balance sheet, due to greater working capital requirements as customers request for delay in delivery for rigs under construction
Upgrade to OUTPERFORM We increase our 2016E Utilities net profit to S$383 mn from S$369 mn, and our 2017E Utilities net profit to S$434 mn from S$404 mn, above consensus expectations of S$378 mn and S$425 mn, respectively. We raise our target price to S$4.20, based on a SOTP valuing the ex-Marine stub at 9x P/E, in line with its historical average. On our estimates, the exMarine stub is currently trading at a P/B of 0.9x, below its historical average of 1.1x, as well as NJA and India peer average of 1.4x. We believe the ex-Marine business is undervalued given its consistent ROE of above 10%, and we expect Sembcorp Industries’ share price to be supported by an attractive dividend yield of 4.5%. Other risks include potential provisions for bad debt from JAC, as well as weak financial position of India partners.
Sembcorp Industries Limited (SCIL.SI / SCI SP)
We raise our target price to S$4.20, based on a SOTP valuing the ex-Marine stub at 9x P/E, in line with its historical average
3
22 September 2015
Valuation Figure 7: NJA Utilities valuation sheet
1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
1 2 3 4 5
1 2 3 4
1
Stock Monday, September 21, 2015 Sembcorp Industries CHINA Beijing Enterprise CGN CR Gas CR Power CSG China Datang China Gas China Longyuan Chuantou Datang (A) Datang (H) ENN Energy GDI HDF HDP (A) HDP (H) HNR Huaneng (A) Huaneng (H) Jingneng Kunlun Energy Mengdian SDIC SZ Gas Yangtze Power Sector* HONG KONG CKI CLP HKCG HKE PAH Sector* INDIA JSW Energy NTPC PGCIL VA Tech Sector* INDONESIA Perusahaan Gas
SOUTH KOREA 1 KEPCO
1 2 3 4
1 2 3 4 5
1 2
1 2 3 4
MALAYSIA Malakoff Tenaga YTL Corp YTLP Sector* PHILIPPINES Aboitiz Power EDC First Gen Manila Water Meralco Sector* SINGAPORE Hyflux Keppel Infra Sector* THAILAND EA EGCO GLOW SPCG Sector*
Bberg Ticker
View
Local
Price Target
Upside (%) 4.20 18
3M Avg daily Market cap t/o (USDm)
SCI SP
O
Local SGD
3.57
392 HK 1816 HK 1193 HK 836 HK 956 HK 1798 HK 384 HK 916 HK 600674 CH 601991 CH 991 HK 2688 HK 270 HK 816 HK 600027 CH 1071 HK 958 HK 600011 CH 902 HK 600578 CH 135 HK 600863 CH 600886 CH 601139 CH 600900 CH
O U O U O O O O O U O N N O U U O U U O N O N U O
HKD HKD HKD HKD HKD HKD HKD HKD CNY CNY HKD HKD HKD HKD CNY HKD HKD CNY HKD CNY HKD CNY CNY CNY CNY
48.50 3.43 20.95 18.26 1.39 1.03 11.06 8.70 10.89 5.71 3.15 41.05 10.94 2.85 7.26 6.61 2.75 9.09 8.89 5.64 5.74 4.58 12.04 8.42 14.73
78.00 3.10 27.00 16.00 2.50 1.45 18.00 11.50 12.50 3.70 4.60 53.00 11.60 5.00 4.70 5.60 4.00 5.80 7.30 10.00 5.70 7.50 11.30 6.60 14.80
61 (10) 29 (12) 80 41 63 32 15 (35) 46 29 6 75 (35) (15) 45 (36) (18) 77 (1) 64 (6) (22) 0 19
8,038 20,115 6,012 11,309 666 967 7,098 9,021 7,529 10,310 10,310 5,737 8,830 3,092 10,753 10,753 3,452 19,487 19,487 4,090 5,979 4,178 12,832 2,880 38,171 200,545
1038 HK 2 HK 3 HK 2638 HK 6 HK
O U U N N
HKD HKD HKD HKD HKD
69.70 64.75 14.94 5.55 74.00
80.00 62.00 13.10 5.30 80.00
15 (4) (12) (5) 8 0
22,660 21,108 22,288 6,328 20,379 92,763
17.9 27.9 26.0 7.5 30.9
JSW IN NTPC IN PWGR IN VATW IN
O N O O
INR INR INR INR
86.50 126.60 136.65 686.85
110.00 140.00 180.00 950.00
27 11 32 38 27
2,156 15,867 10,866 569 29,458
PGAS IJ
O
IDR
2,850.00
6,850.00
140
015760 KS
O
KRW 47,400.00 64,000.00
MLK MK TNB MK YTL MK YTLP MK
O U N U
MYR MYR MYR MYR
1.58 12.18 1.59 1.59
AP PM EDC PM FGEN PM MWC PM MER PM
N O O U N
PHP PHP PHP PHP PHP
HYF SP KIT SP
N O
EA TB EGCO TB GLOW TB SPCG TB
U N O O
Absolute Performance (%)
FYE Actual 1w 1m YTD 12m T 5 12 (5) (18) Dec - 14
1w 1m YTD 12m 6 9 (20) (31)
1d
(2) 11 (3) (4) 8 1 (2) 4 2 1 3 (1) 3 10 (0) 3 1 1 1 3 (0) 2 (21) 4 0
6 8 13 (4) 3 (1) (4) 5 (2) (7) (1) 7 0 9 (8) 11 3 (6) (0) (12) (1) (16) (21) (19) 0
(20) 2 4 (9) (14) 0 (9) 8 5 (17) (24) (7) 8 (22) 4 (3) 10 3 (15) (11) (22) 0 5 2 38
(30) (5) (20) (38) (7) (21) 8 31 41 (24) (25) 20 (38) 84 16 (0) 46 0 46 (53) 49 81 13 93
(2) 3 (1) (3) (1) 1 (2) (0) 1 3 1 2 1 (4) 2 (0) (1) 1 (0) 3 (2) 3 (10) 3 0
(4) 9 (5) (6) 6 (1) (4) 2 3 2 1 (3) 1 8 0 1 (1) 2 (1) 4 (2) 3 (20) 5 1
8 10 15 (2) 5 1 (2) 7 8 2 1 9 2 11 2 13 5 3 2 (2) 1 (7) (11) (9) 9
(10) 12 14 1 (4) 10 0 18 13 (9) (15) 3 18 (12) 12 7 19 11 (5) (3) (12) 8 13 10 46
1 (0) 0 0 2
4 1 (1) 0 6
8 (0) 0 2 8
21 (4) (7) 8 (2)
26 1 (5) 8 8
2 0 1 1 3
3 (0) (2) (1) 5
10 3 3 5 11
29 4 0 16 6
37 12 5 19 18
0.4 0.5 0.3 0.2
4 (0) 2 (1)
3 1 7 (0)
17 3 3 (8)
(16) (3) (0) (8)
13 (0) 0 (6)
5 (0) 2 (1)
2 (0) 6 (1)
22 7 7 (4)
(11) 1 4 (3)
17 3 3 (2)
4,781
7.4
(2)
7
(11)
(53)
(52)
(2)
7
(12)
35
25,911
41.3
(0)
(3)
(4)
11
5
1
(4)
2.00 10.00 1.60 1.30
27 (18) 1 (18) (12)
1,858 16,163 4,035 2,781 24,837
1.9 27.8 2.2 1.0
(3) (0) 1 (1)
(1) 2 0 (2)
12 16 4 3
(12) 0 7
(2) (5) (2)
(1) 1 3 1
43.05 6.05 23.50 23.30 295.60
44.20 9.80 30.40 19.90 280.00
3 62 29 (15) (5) 8
6,808 2,438 1,849 1,010 7,160 19,265
2.2 2.2 1.6 0.6 3.5
1 (1) (2) 1 (1)
(1) 12 7 9 3
(2) (3) (1) (1) 5
1 (25) (8) (18) 18
8 (16) (6) (18) 17
SGD SGD
0.71 0.53
1.00 0.57
41 9 16
437 1,440 1,877
0.4 1.3
(1) (1)
13 2
(1) 11
(16) 3
THB THB THB THB
21.40 155.00 87.00 24.60
20.00 170.00 115.00 29.00
(7) 10 32 18 17
2,233 2,283 3,560 636 10,851
3.3 1.4 1.8 0.8
0 0 4 0
2 2 2 1
4 1 (2) 2
(14) (7) (3) (9)
Sector Average - NJA*
4,539
416,161
11.3
1d 2
Relative Performance (%)
12.4 (3) 56.9 2 12.0 (2) 16.2 (4) 1.3 (1) 0.3 0 13.7 (3) 14.8 (1) 184.9 1 104.0 3 9.1 1 18.3 1 11.1 (0) 7.6 (5) 236.4 2 8.2 (1) 8.9 (2) 191.6 1 26.0 (1) 69.9 3 13.6 (3) 193.6 3 609.0 (10) 28.6 3 0.0 0
P/E (x)
Dvd Yld (%)
ROE (%)
P/BV (x) T+1
NetDebt/ Equity (%)
T 8.0
T+1 9.6
T+2 8.7
4.5
11.4
1.1
12.8 22.4 18.3 9.5 12.5 48.3 16.4 22.5 13.5 30.0 13.6 15.6 15.5 10.0 10.7 8.0 18.2 12.1 9.7 10.2 8.3 19.6 14.6 23.1 20.5 13.7
10.6 21.8 15.0 7.4 8.7 13.2 13.5 13.7 10.6 15.5 7.0 13.8 16.6 7.7 10.7 8.0 11.5 10.9 8.7 12.3 11.5 25.6 11.6 21.0 20.6 12.0
9.4 18.8 11.9 7.5 6.0 9.0 10.6 11.0 10.3 13.0 5.9 12.0 16.6 6.3 13.3 9.9 8.2 12.1 9.7 12.7 10.1 16.0 10.9 18.7 21.8 11.8
2.8 1.5 1.5 4.3 3.9 0.8 1.8 1.4 0.9 2.6 5.7 2.2 2.4 2.6 3.7 5.0 1.7 5.1 6.3 2.8 2.5 4.1 3.0 1.9 2.6 3.3
10.0 11.1 17.6 15.7 6.4 4.8 20.6 12.0 28.8 10.4 10.4 20.3 13.0 16.0 18.0 18.0 11.4 16.6 16.6 14.1 7.5 9.4 27.9 14.0 13.2 15.2
1.0 38.9 2.3 152.3 2.5 22.0 1.1 105.9 0.5 112.2 0.6 338.1 2.6 57.9 1.6 162.2 2.7 24.7 1.6 281.1 0.7 281.1 2.6 38.4 2.1 Net cash 1.2 304.8 1.7 238.6 1.3 238.6 1.2 291.7 1.7 174.3 1.4 174.3 1.7 50.4 0.8 41.1 2.4 171.4 3.0 236.4 2.8 41.1 2.7 46.3 1.6 137
Dec - 14 Dec - 14 Dec - 14 Dec - 14 Dec - 14 Dec - 14
5.3 14.6 24.3 14.3 2.6 6.2
16.0 15.3 23.3 15.3 19.9 17.9
15.6 15.0 22.4 15.0 19.7 17.5
3.7 4.2 2.6 6.7 3.6 3.7
11.1 11.9 13.7 6.5 6.4 10.6
1.7 5.0 1.8 65.8 3.1 32.0 1.0 86.5 1.3 Net cash 1.7 20
Mar - 15 Mar - 15 Mar - 14 Mar - 15 Dec - 14
10.3 11.9 15.8 33.9 11.6
10.3 11.5 14.4 24.3 11.7
9.2 11.1 11.7 18.2 11.4
2.3 4.6 1.5 0.7 7.6
17.1 10.8 13.7 15.9 12.3
1.7 183.3 1.2 133.4 1.9 231.9 3.6 Net cash 1.4 153
(36)
(36) Dec - 14
6.6
6.2
5.6
7.7
26.0
1.5
9.1
(9)
8
9 Dec - 14
6.3
2.8
6.5
3.2
18.4
0.5
84.2
(1) 2 0 (2)
8 12 (0) (1)
(5) 7 14
Dec - 14 10 Aug - 14 6 Jun - 13 10 Jun - 14 Dec - 14
15.1 11.4 13.3 11.0 9.0
19.6 10.6 11.1 13.4 9.5
16.5 9.8 11.8 16.0 10.0
5.6 2.2 8.2 6.3 4.4
8.3 12.9 11.1 9.2 11.6
1.3 1.3 1.0 1.2 1.1
197.8 43.9 104.3 140.1 75
1 (0) (2) 2 (0)
(1) 12 6 9 3
1 0 2 1 7
3 (23) (6) (16) 20
18.5 12.8 10.9 8.7 18.4 15.0
17.5 12.1 10.0 9.1 17.9 14.6
16.0 9.8 9.1 9.3 18.0 13.8
3.9 2.9 1.4 3.7 5.2 4.1
18.9 20.6 11.2 14.6 23.3 19.9
3.2 64.4 2.3 99.1 1.1 109.6 1.3 56.8 4.1 Net cash 2.6 35
(35) 9
(1) (1)
12 2
2 14
(2) 18
na (153.0) 89.5 54.7 33.5 77.1
11.1 48.7 26.5
3.2 7.1 6.4
(0.4) 2.9 2.1
0.7 1.7 1.2
52.4 104.7 93
(13) (4) (6) (7)
(0) 0 3 (0)
1 1 1 0
2 (1) (4) 0
(7) (0) 4 (2)
Dec - 14 Dec - 14 Dec - 14 Dec - 14 Dec - 14
49.6 10.6 13.9 13.0 13.3
29.4 11.4 15.2 10.7 14.0
16.7 10.3 14.3 9.2 12.3
0.2 4.0 5.8 3.7 3.8
37.6 9.5 17.5 33.2 19.5
9.4 1.1 2.5 3.2 1.9
196.6 94.5 75.3 154.4 98
Dec - 14
10.0
10.5
11.9
3.8
14.5
1.4
100.1
2
(22) Dec - 14 Dec - 14 4 Dec - 14 (12) Dec - 14 (30) Dec - 14 1 Dec - 14 (13) Mar - 15 17 Dec - 14 (3) Dec - 14 7 Dec - 14 (16) Dec - 14 (16) Dec - 14 29 Dec - 14 (30) Dec - 14 50 Dec - 14 24 Dec - 14 8 Dec - 14 12 Dec - 14 9 Dec - 14 12 Dec - 14 (45) Dec - 14 15 Dec - 14 47 Dec - 14 (21) Dec - 14 58 Dec - 14 Dec - 14
11 (13) (4) (15) 20
Dec - 14 Dec - 14 Dec - 14 Dec - 14 Dec - 14 Dec - 14
(23) Dec - 14 22 Dec - 14 Dec - 14 (1) 8 6 5
32.1
Note: Price as of 21 September 2015. Source: Thomson-Reuters, company data, Credit Suisse estimates
Sembcorp Industries Limited (SCIL.SI / SCI SP)
4
22 September 2015
India power plants to drive growth Increasing exposure to India power market Sembcorp’s 1,320 MW coal-fired Thermal Powertech Corporation India (TPCIL) power plant in India commenced full commercial operation in September 2015 following the completion of its second 660 MW unit. The first 660 MW unit started operations in April 2015. Sembcorp also owns a 49% stake in NCC Power Projects (NCCPP), which is building a 1,320 MW coal-fired power plant scheduled for completion in 2016. Both TPCIL and NCCPP are located in Andhra Pradesh, a province in south India. Figure 8: Sembcorp Industries Utilities assets in India
Figure 9: Both TPCIL and NCCPP are in Andhra Pradesh
Source: Company data
Source: Company data
Coastal location in south India presents advantages India as a whole is a well-supplied market based on power generation capacity According to our India capital goods analyst Lokesh Garg, significant capacity addition as well as a large pipeline of plants under construction have ensured that India is a wellsupplied market based on total generation capacity. Figure 10 shows a basic supply demand model for the Indian electricity sector and we conclude that the Indian power sector can meet the power demand of stronger GDP growth rates. In the model, we assume thermal power generation capacity addition at a run rate of 15 GW given the pipeline of plants under construction as well as improvement in plant load factor (PLF) back to levels in FY10-11 over a period of time. Please refer to report India Utilities Sector – Islands of calm in turbulent waters (14 May 2015) by Lokesh Garg.
Sembcorp Industries Limited (SCIL.SI / SCI SP)
5
22 September 2015
Figure 10: Prima-facie a well-supplied market from a generation capacity perspective 2011
2012
2013
2014
2015
2016E
2017E
2018E
2025E
8.5
6.5
5.1
5.1
6.5
7.0
7.5
7.5
7.5
Power requirement Assumed GDP grth. (%) Elasticity to GDP grth. (x)
0.44
1.35
1.27
0.08
1.00
1.00
0.90
0.90
0.90
Total demand (BU)
862
937
998
1,002
1,067
1,088
1,162
1,240
1,959
Demand growth
3.8
8.8
6.5
0.4
6.5
2.0
6.7
6.7
6.7
Power availability Capacity (GW) Hydro
38
39
39
41
41
43
44
45
52
Coal
94
112
130
145
165
180
195
210
315
Gas
18
18
20
22
23
23
23
23
23
326
535
Capacity (GW)
174
200
223
243
268
287
307
Hydro
114
131
114
135
129
147
152
157
181
Coal
567
613
692
746
836
875
951
1,027
1,709
Gas
100
93
67
45
41
57
71
71
81
Total availability (BU)
817
877
912
967
1,048
1,121
1,217
1,366
2,274
Growth (%)
6.2
7.4
4.0
6.0
8.4
7.0
8.5
12.3
11.1
Generation (BU)
Power deficit (%) Thermal cap. addition* (GW) - Of which coal
5.2
6.4
8.6
3.5
1.8
(3.0)
(4.7)
(10.2)
(16.1)
11.1
20.2
20.4
16.1
20.1
16.5
16.5
16.0
16.0
9.7
18.1
18.2
15.1
19.4
15.0
15.0
15.0
15.0
73
68
65
62
62
58
58
58
62
Utilisation/PLF (%) Coal capacity PLF (%)
* Thermal capacity addition (coal, lignite and gas based) Source: Credit Suisse estimates.
Transmission constraints remain However, transmission and distribution constraints limit the utilisation of this generation capacity as well as impede the supply of high quality power to consumers. Transmission capacity (particularly inter-regional) is still short of demand and in some cases where capacity has come up, utilisation of inter-regional transfer capacity is low given constraints at both ends of high capacity corridors. Distribution utilities continue to operate inefficiently with high transmission and distribution losses, leading to viability issues. This has kept aggregate technical and commercial losses at high levels of 25-27%.
Sembcorp Industries Limited (SCIL.SI / SCI SP)
6
22 September 2015
Figure 11: AT&C losses at ~25% driven by underinvestment; partly a euphemism for theft T&D losses (%)
AT&C losses (%)
40 35
33
35
34 31
33 30
29
30
31 27
29
25
27
25
27
25
24
27
26
25
24
23
FY12
FY13
20 15 10 5 FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
Source: Company data, Credit Suisse estimates
Higher merchant tariffs in south India According to the Central Electricity Authority, the southern, northern and north-eastern provinces in India faced the highest power supply deficit in 2014-15, with the southern and north-eastern provinces expected to continue facing power supply deficit of 11.3% in 2015-16, as shown in Figure 12 and Figure 13. Figure 12: Actual power supply position by region for
Figure 13: Anticipated power supply position by region
2014-15
for 2015-16
0.0%
-1.0%
4.0%
2.0%
2.0%
-0.8%
-2.0%
3.3%
-1.6%
0.0%
-3.0%
-0.4%
-2.0%
-2.1%
-4.0%
-4.0%
-4.1%
-5.0%
-6.0%
-6.0%
-8.0%
-6.3%
-7.0%
-10.0%
-8.0% -9.0%
-8.7%
-10.0%
-12.0%
-11.3%
-11.3%
Southern
North-eastern
-14.0% Western
Eastern
Southern
Source: Central Electricity Authority (India)
Northern
North-eastern
Western
Eastern
Northern
All India
Source: Central Electricity Authority (India)
As shown in Figure 14 and Figure 15, Andhra Pradesh faced a 5% shortage of power supply in 2014-15, and is expected to face a 12% power shortage in 2015-16.
Sembcorp Industries Limited (SCIL.SI / SCI SP)
7
22 September 2015
Figure 15: Anticipated annual power supply position by
15
state for 2015-16
10%
120% 100%
0% 0% 0% 0% 0%
0%
-15% -20%
-25% -30%
Source: Central Electricity Authority (India)
48%
60%
23% 21% 20% 10% 9% 8% 8% 6% 5% 4% 4% 4% 4% 3% 1% 1% 0%
-10%
80%
Chandigarh Daman & Diu Gujarat Sikkim Lakshadweep D.N. Haveli 0% Delhi 0% Haryana 0% Madhya Pradesh -1% Rajasthan -1% West Bengal -1% Goa -1% Himachal Pradesh -1% Punjab -1% Puducherry -1% Chhattisgarh -1% Maharashtra -1% Kerala -2% Odisha -2% DVC -3% Bihar -3% Jharkhand -3% Uttarakhand -3% Tamil Nadu -3% Manipur -4% Nagaland -4% Karnataka -4% Andhra Pradesh -5% Telangana -6% Mizoram -7% Assam -7% Arunachal Pradesh -10% Meghalaya -15% Tripura -16% Uttar Pradesh -16% Jammu & Kashmir -19% Andama & Nicobar -25%
-5%
40% 20% 0% -20% -40% -60%
Sikkim Tripura Himachal Pradesh Delhi Puducherry DVC Mizoram Madhya Pradesh Haryana Orissa Punjab Meghalaya Chhattisgarh Maharashtra West Bengal Rajasthan Daman & Diu D.N. Haveli Gujarat Goa -1% Manipur -3% Tamil Nadu -4% Bihar -5% Uttarakhand -5% Chandigarh -5% Andhra Pradesh -12% Uttar Pradesh -13% Kerala -14% Karnataka -16% Telangana -17% Arunachal Pradesh -18% Jammu & Kashmir -22% Assam -24% Jharkhand -26% Nagaland -30%
5%
118%
Figure 14: Actual power supply position by state for 2014-
Source: Central Electricity Authority (India)
This has resulted in higher merchant tariffs in south India as it remains a power shortage region despite significant generation capacity additions at the country level. This is on account of a lack of adequate transmission capacity between the western region (where new projects have come up) and the southern region, where new capacities have been lower than demand. As shown in Figure 16, the average traded power price in south India was Rs5.9/kWh, compared to Rs3.2/kWh for the rest of the country in 2014. This trend continued in 2015, where average traded power prices were Rs4.6/kWh and Rs2.8/kWh YTD, respectively. In Andhra Pradesh, average traded power prices were Rs4.05/kWh YTD. Figure 16: Average traded power prices are significantly higher in South India since 2012 14.00 12.00
INR/kWh
10.00
8.00 6.00 4.00 2.00 0.00 Jan-09
Aug-09
Mar-10
Oct-10
May-11 Dec-11
Average - India
Jul-12
Average - South India
Feb-13
Sep-13
Apr-14
Nov-14
Jun-15
Andhra Pradesh
Source: Indian Energy Exchange
Access to coal reduces operational risk TPCIL and NCCPP’s port-based location improves logistics for both imported and domestic coal, thus enhancing fuel security for the plants. In addition, we believe the coal situation in India has improved meaningfully, due to the sharp fall in imported coal prices, as well as progress made in raising coal production in India. Fall in international coal prices International coal prices have fallen more than 53% from their 2011 peak and 34% in INR terms due to currency depreciation. This will help to reduce the cost of supplementing the domestic supply of coal. The Credit Suisse commodities team expects coal price to fall to US$55/MT in CY2016 and remain low at US$63/MT through 2019.
Sembcorp Industries Limited (SCIL.SI / SCI SP)
8
22 September 2015
Figure 17: Coal prices down 38% from 2011 peak in INR
Figure 18: CS expects coal prices to average US$55/MT in
terms
2016
7040
140
75
6040
120
70
5040
100
4040
80
3040
60
71
45
55
55
55
55
2017E
0
55
4Q16E
50
Jan-14
56
3Q16E
20
Jan-13
57
2Q16E
1040
Jan-12
58
55
40
Jan-11
60
60
2040
40 Jan-10
63
62
1Q16E
US$/t
65
Jan-15
Source: Bloomberg
2019E
2018E
4Q15E
3Q15E
2Q15A
Indonesian Coal (USD/MT) - RHS
1Q15A
Indonesian Coal (INR/MT) - LHS
2014A
40
Source: Bloomberg, Credit Suisse estimates
Coal India getting back in shape with FY15 having strong production growth Coal India has improved its coal production growth trajectory and has seen a healthy pickup in coal production in FY15, up 6.9% over FY14, as compared to 1.8% CAGR achieved over FY10-14. We believe this is an early result and that the government's focus on increasing coal production would help Coal India grow production at an accelerated pace over the next five years. Senior officials of Coal India have reiterated the target of doubling coal production by Coal India in another four to five years. This, supplemented by 500 MT of coal production from private sector/PSU companies from coal block auctions/allocations, could take the total coal production in the country to about 1,500 MT. The ministry officials highlighted that the target of 1,000 MT for Coal India is not a slogan, but is a bottom-up mine-wise target, wherein the ministry is working on a detailed to-do list for operational managers as well as ministry officials to resolve constraints. In fact, actual mine-wise target adds up to ~900– 950 MT, and 1,000 MT has been chosen as a visible target. To achieve the target of 1,000 MT in five years, new mines are being opened up. Land acquisition is not an issue for expansion as land owners are willing to part with their land, given Coal India's attractive land acquisition policy. Coal India provides compensation and also offers one job per family, which is displaced due to land acquisition.
Estimating returns for Indian power assets Based on our analysis of the Indian power market, we build a detailed bottom-up model for TPCIL and NCCPP. We estimate TPCIL to generate S$41 mn of PATMI in 2016 and S$42 mn in 2017 TPCIL was incorporated in January 2008, a JV between Hyderabad-based Gayatri Energy Venture, a wholly owned subsidiary of Gayatri Projects Limited, and Sembcorp Utilities, a wholly owned subsidiary of Sembcorp Industries. The 1,320 MW coal-fired power plant, consisting of two 660 MW units, was awarded on a build, own and operate (BOO) model. It utilises supercritical technology which allows for enhanced efficiency, and reduces emissions of carbon dioxide and other pollutants. The power plant is located near the coast at Krishnapatam in Andhra Pradesh, a southern province in India. As it is near the Krishnapatnam port, coal is transported to the power plant by covered conveyors. Sembcorp initially acquired a 49% stake in TPCIL for Rs10.42 bn (S$293 mn) in May 2010, before increasing its stake to 65% in July 2014 for approximately Rs4 bn (S$83.7 mn).
Sembcorp Industries Limited (SCIL.SI / SCI SP)
9
22 September 2015
Total investment in the plant was approximately US$1.5 bn. Our profit forecasts are based on the following assumptions: ■
Long-term PPA: In April 2013, TPCIL secured a 25-year 500 MW power purchase agreement with the Andhra Pradesh and Telangana power distribution companies, wholly owned by the state government. Management aims to secure another longterm 600 MW power purchase agreement for the second 660 MW unit with the Telangana power distribution company. We base our tariff assumption on a leverised tariff of Rs3.675/kWh in 2014, at an annual inflation adjustment of 3%.
■
Spot tariff: For remaining capacity not covered by long-term PPAs, we assume a spot tariff of Rs4.00/kWh, based on a 2015 YTD average tariff in Andhra Pradesh of Rs4.05/kWh, but 23% lower than the 2014 average tariff of Rs5.2/kWh.
■
Plant load factor: We assume an average plant load factor of 83% in 2016 and 80% in the long term—more conservative than the company's expectation of about 85% load factor. This would bring it in line with the average plant load factor of JSW's South India Vijaynagar plant of 81% in 2Q15. Unit 1 of TPCIL achieved an average plant load factor of 96% in June 2015 and has been consistently operating with a plant load factor above 90% since then.
■
Coal supply: TPCIL has secured a contract with Indonesia-based PT Bayan Resources Tbk for the supply of 1 million tonnes per annum (MTPA) of coal over ten years. It has also signed a Fuel Supply Agreement (FSA) with Mahanadi Coal Fields (MCF), a subsidiary of Coal India Limited (CIL) for the supply of 2.543 MTPA of coal for a 20-year period once the plant becomes operational. The two contracts with PT Bayan Resources and MCF will supply about 60% of TPCIL’s total coal requirements of 5.5 MTPA. TPCIL aims to secure more coal with Coal India upon the securing of the second long-term PPA.
■
Coal price: We assume a domestic coal price of Rs2,525/MT based on a pit head price of Rs1,250/MT. For imported coal, we base it on Credit Suisse’s coal price assumption of US$55/MT in 2016 and 2017 and US$63/MT in the long term.
■
FX: We base our assumptions on Credit Suisse’s USD/INR forecast of 68.5 in 12 months, and SGD/INR forecast of 47.9. According to the Credit Suisse economics team, improving indicators of growth in India should increasingly lean against a continuation of equity outflows if global markets stabilise. Most indicators we follow suggest Indian economic growth is improving. Consumer demand seems robust. Government spending seems to be rising after delays earlier this year and should gain momentum as the monsoon tapers down.
Figure 19: TPCIL—financial statement Rs mn
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
Total revenue
17,591
34,091
34,182
34,689
35,645
36,631
37,645
38,691
39,767
40,876
42,018
Fuel expense
8,237
16,334
16,690
17,461
18,082
18,625
19,183
19,759
20,352
20,962
21,591
871
1,793
1,847
1,903
1,960
2,019
2,079
2,142
2,206
2,272
2,340
EBITDA
8,483
15,963
15,644
15,325
15,603
15,987
16,383
16,790
17,210
17,642
18,087
Interest cost
6,613
8,553
8,201
7,848
7,495
7,142
6,790
6,437
6,084
5,732
5,379
Depreciation
1,809
3,618
3,618
3,618
3,618
3,618
3,618
3,618
3,618
3,618
3,618
PBT
61
3,793
3,826
3,859
4,491
5,227
5,976
6,736
7,508
8,293
9,091
Tax
12
759
765
772
898
1,045
1,195
1,347
1,502
1,659
1,818
PAT
49
3,034
3,061
3,087
3,592
4,182
4,780
5,389
6,006
6,634
7,273
SCI's 65% stake
32
1,972
1,990
2,007
2,335
2,718
3,107
3,503
3,904
4,312
4,727
1
41
42
42
49
57
65
73
82
90
99
O&M expense
In SGD
Source: Company data, Credit Suisse estimates
Sembcorp Industries Limited (SCIL.SI / SCI SP)
10
22 September 2015
We estimate NCCPP to generate S$34 mn of PATMI in 2017 and S$35 mn in 2018 NCCPP is Sembcorp’s second thermal power plant in India, located adjacent to TPCIL. It is a 1,320 MW coal-fired power plant with expected completion in 2016. Sembcorp announced its acquisition of a 45% stake in NCCPP for Rs8.48 bn (approximately S$175 mn) in February 2014. Subsequently in May 2014, Sembcorp increased its stake in NCCPP to 49%, investing an additional Rs754 mn (approximately S$15.7 mn). The remaining 51% is held by NCC Infra Holdings, jointly owned by NCC Limited and Gayatri Energy Ventures. Total investment in the plant is also expected to be approximately US$1.5 bn. ■
Long-term PPA: NCCPP is the second lowest bidder for a 500 MW long-term PPA with the Andhra Pradesh distribution company (discom).
Figure 20: NCCPP—financial statement INR mn
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
Total revenue
31,626
35,870
36,423
36,982
37,546
38,116
38,691
39,767
40,876
42,018
Fuel expense
16,334
16,690
17,461
18,082
18,625
19,183
19,759
20,352
20,962
21,591
O&M expense
1,793
1,847
1,903
1,960
2,019
2,079
2,142
2,206
2,272
2,340
13,499
17,332
17,059
16,940
16,903
16,853
16,790
17,210
17,642
18,087
Interest cost
9,653
9,266
8,880
8,494
8,108
7,722
7,336
6,950
6,564
6,178
Depreciation
3,960
3,960
3,960
3,960
3,960
3,960
3,960
3,960
3,960
3,960
PBT
(113)
4,106
4,219
4,486
4,835
5,171
5,494
6,300
7,118
7,950
Tax
-
821
844
897
967
1,034
1,099
1,260
1,424
1,590
PAT
(113)
3,285
3,375
3,589
3,868
4,137
4,396
5,040
5,695
6,360
(56)
1,610
1,654
1,758
1,895
2,027
2,154
2,470
2,790
3,116
(1)
34
35
37
40
42
45
52
58
65
EBITDA
SCI's 49% stake In SGD
Source: Company data, Credit Suisse estimates
Risks from weak financial position of partners and customers We believe the key risks relating to India power are as follows: ■
Financial position of partners: We believe one of the key remaining risks for Sembcorp in India would be the reliability of its partners, which are in a weak financial position. However, we believe this is partly mitigated by Sembcorp’s active involvement in significant operational and commercial aspects of the plants, including being the project manager during the construction phase as well as in negotiating the PPAs.
■
Financial position of Andhra Pradesh discom: According to a Power Finance Corporation (PFC) report, the Andhra Pradesh discom had one of the highest losses in 2012-13. However, we believe that in absolute terms discom health has improved on the back of (1) massive tariff hikes that have been absorbed, and (2) increase in subsidy payments from states. According to Sembcorp, there have not been any payments missed so far.
■
Long-term PPAs yet to be secured: We believe there would be greater certainty on plant economics should the 600 MW long-term PPA for TPCIL, and 500 MW long-term PPA for NCCPP be secured. This would also provide increased visibility on coal security and price linkages.
Sembcorp Industries Limited (SCIL.SI / SCI SP)
11
22 September 2015
Weak financial position of partners Gayatri Projects Limited (GPL) is an India-based infrastructure company established in 1963, specialising in the EPC construction of road, irrigation, power transmission and industrial projects. It has completed projects comprising over 5,000 km of roads, 1,200 km of irrigation canals and other industrial projects. GEV, a subsidiary of GPL, was set up to undertake power generation projects. GPL initiated a debt restructuring scheme under the Joint Lenders Forum, a framework by the Reserve Bank of India for managing bad loans, as it was facing liquidity constraints arising from increased working capital requirements, higher COGS and interest costs and a slowdown in the infrastructure market in India. The debt restructuring scheme was approved by lenders in January 2015, and GPL’s shortterm loans were converted into long-term loans with a reduction in finance costs and interest rates. Figure 21: GPL’s net gearing increasing
Figure 22: Interest coverage ratio declining
2.50
2.31
2.17
2.00
1.81
1.55
3.00
2.82
2.50
2.34
1.67
1.99
1.95
2.00
1.50
1.70
1.43
1.50 1.00
1.00 0.50
0.50
FY11
FY12
FY13
FY14
FY15
0.00 1
2
3
Net gearing (x)
4
5
6
Interest coverage (x)
Source: Company data
Source: Company data
NCC Infra, a subsidiary of NCC Limited, is involved in the development of infrastructure projects, including power generation plants, construction and maintenance of roads, and hydro electric projects. It has currently two power projects under development: NCCPP with 1,320 MW capacity and Himalayan Green Energy with 280 MW capacity. In October 2014, NCC Limited raised Rs6 bn from a 7:6 rights issue, with the funds used for the repayment of short-term loans and general corporate purposes. Following the rights issue, the company’s outstanding debt declined from Rs28 bn to Rs22 bn, resulting in interest savings of Rs600-700 mn p.a. In addition, NCC Limited’s 2014-15 annual report noted that the stake sale of NCCPP to Sembcorp Industries was part of an asset monetisation effort to bring in additional liquidity to reduce debt and meet working capital requirements. Figure 23: Net gearing declines post rights issue
Figure 24: Interest coverage barely above 1x 3.50
1.20
1.00
3.00
0.95 0.83
0.80
2.89
0.89 2.50
0.80
2.00
0.57
0.60
1.50
1.04
0.40
1.16
0.20
1.13 0.87
1.00
0.50 0.00
FY11
FY12
FY13
FY14
FY15
FY11
Sembcorp Industries Limited (SCIL.SI / SCI SP)
FY13
FY14
FY15
Interest coverage (x)
Net gearing (x)
Source: Company data
FY12
Source: Company data
12
22 September 2015
Singapore power market close to bottom Reserve margin peaked in 2014 on our estimates Significant capacity addition since 2013 Power generation capacity in Singapore has increased by 2.8 GW or 28% since 2013 with the completion of Singapore’s LNG terminal in 2Q13 which increased gas supply. Figure 25: Planned installed capacity growth in 2013–15 Generation Company
Keppel Merlimau Cogen
Installed Expected Update capacity (MW) commission date 800 Mid 2013 Commenced operations in 2Q13
ExxonMobil
220
Mid 2013
Commenced operations in Apr-13
PacificLight Power
800
End 2013
Commenced operations in 1Q14
Tuas Power Generation
400
End 2013
Commenced operations in 2Q14
Sembcorp Cogen
400
End 2013
Commenced operations in Oct-14 following delay due to lack of grid connection
Soxal
5
4Q14
SLNG
15.6
4Q14
CGNPC
9.9
4Q14
Biofuel Industries
9.9
4Q14
Shell Eastern Petroleum
67.8
2Q15
Commenced operations in Apr-15
Source: Energy Market Authority, company data, Credit Suisse
Capacity addition to slow in 2015-16 Based on data from Energy Market Authority (EMA), capacity addition is expected to slow down after 2015 with the only large capacity addition being Hyflux's Tuaspring power plant which is currently undergoing commissioning and expected to commence operations in 1Q16. The other power generation supply addition consists mainly of smaller scale embedded generation by industrial customers. Figure 26: Project commercial operating date (COD) of the new capacities (2016-17) Company
Plant type
Capacity change (MW)
Period
Tuaspring
CCGT
411
1Q16
Exxon
Embedded generation
47
1Q17
Exxon
Embedded generation
47
1Q17
SRC
Embedded generation
42
1Q17
SRC
Embedded generation
2
1Q17
SRC
Embedded generation
42
2Q17
BMCC
32.5 623.5
3Q17
TP Utilities Total
Source: Energy Market Authority, The Lantau Group
We base the Credit Suisse power generation model on the following: ■
Historical generation capacity is based on data from the Energy Market Authority, while additions are based on announced completion dates of planned expansions. We assume no further capacity changes from 2017 onwards.
■
Forecast peak demand is driven by Singapore GDP growth, which Credit Suisse expects to be 2.2% in 2015 and 3.2% in 2016. Thereafter, GDP is expected to grow by 3.0% p.a., in line with the Ministry of Trade and Industry (MTI)'s medium-term growth forecast of 2-4%.
Sembcorp Industries Limited (SCIL.SI / SCI SP)
13
22 September 2015
Figure 27 shows the annual installed capacity in Singapore from 2007–20. We believe that the reserve margin (peak demand minus installed capacity as a percentage of installed capacity) reached a low of about 34% in 2011, leading to higher electricity prices during this period. However, with installed capacity growing by 11% in 2013 and 15% in 2014, the reserve margin increased to 47%, above the 2007 level. With demand growth expected to exceed supply growth from 2015E, we expect the reserve margin to decline to 45% in 2017E. By 2020E, the reserve margin is expected to decline to 40%, in line with the 2008 level. Figure 27: Credit Suisse power generation model suggests reserve margin would decline in 2015E 16000
(MW)
80%
14000
70%
12000
60%
10000
50%
8000
40%
6000
30%
4000
20%
2000
10%
0
0%
2007
2008
2009
2010
2011
2012
Total Generation Capacity - LHS
2013
2014
2015
2016
2017
Peak demand - LHS
2018
2019
2020
Reserve Margin - RHS
Source: Energy Market Authority, company data, Credit Suisse estimates
The increase in capacity has led to a decrease in the Uniform Singapore Electricity Price (USEP) since 2013. USEP is the weighted average price in the wholesale electricity market, and is determined through the interaction of offers made by generation companies and consumer demand. The average USEP declined 21% from S$173/MWh in 2013 to S$137/MWh in 2014.
Strong profitability for gencos in 3Q15 However, USEP bounced strongly to average S$207/MWh in July 2015, driven by unplanned downtime at some power generation units. While power prices have normalised to average S$102/MWh in August, we believe the strong spot prices in July would lead to strong profit for Singapore power plants in 3Q15. Figure 28: Uniform Singapore Electricity Price (USEP)—
Figure 29: USEP spiked in July 2015
S$/MWh 300
300.00
250
250.00
200
200.00
150
150.00
100
100.00
50
50.00
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15
0
Uniform Singapore Electricity Price ($/MWh) (LHS)
Source: Energy Market Company
Sembcorp Industries Limited (SCIL.SI / SCI SP)
0.00 1-Jun-15
1-Jul-15
1-Aug-15
1-Sep-15
USEP 7 day MA (S$/MWh)
Source: Energy Market Company
14
22 September 2015
Disruption from Hyflux’s power plant might be lower than expected In our view, the impact from Hyflux’s 411 MW power plant might be smaller than expected, as part of the capacity increase will be used for its water desalination plant. Hyflux's 411 MW combined cycle gas turbine power plant co-located with Tuaspring Desalination Plant has been connected to the national power grid. Testing and commissioning started on 5 August 2015 and the plant is expected to be fully operational in early 2016. Hyflux intends to supply its own power needs for its two water desalination plants and manufacturing hub in Tuas. With the desalination plants expected to take up about 50 MW of the capacity (12% of 411 MW), net addition to supply will be smaller than expected. As an incentive to participate as market maker for electricity futures, EMA has given forward sales contracts to market makers such as Hyflux. Other channels through which Hyflux intends to sell electricity produced would include retail contracts for contestable customers and sell contracts on the futures platform as liquidity picks up. Figure 30: Trading volume in the futures platform has
Figure 31: Forward curve for USEP
been low 30
140
25
130
20
120
15
110
10
100
5
90
130
92
0 4/6/2015
89
86
80
18/6/2015
2/7/2015
16/7/2015 Daily trading volume
30/7/2015
13/8/2015
27/8/2015
Sep-15
Oct-15
Nov-15
Dec-15
Average
Source: Bloomberg
Jan-16
Feb-16
Mar-16
Apr-16
May-16
Jun-16
SGX USEP Futures (S$)
Source: Bloomberg
Vesting contract levels decline slowing Following a biennial review, EMA has announced that the vesting contract level will be progressively reduced from 40% to 30% for 1H15, 25% for 2H15, and 20% for 2016. This was driven by the view that it can be lowered to the LNG vesting level (about 16%) for 2015–16 without market power concerns. The gradual reduction is intended to allow the respective retail arms to adjust their hedging portfolios and contract cover as the vesting contract level is reduced from 40% to 20%. In particular, it was noted that there is no intent for vesting contracts “to provide revenue certainty to the gencos nor is the sustainability of gencos' revenue a factor that should be taken into account when setting the VCL.” Figure 32: Vesting contract level to fall to 30% in 1H15, 25% in 2H15, and 20% in 2016 Period
Vesting contract level
1 Jan 2011 - 31 Dec 2011
60%
1 Jan 2012 - 30 Jun 2013
55%
1 Jul 2013 - 31 Dec 2013
50%
1 Jan 2014 - 31 Dec 2014
40%
1 Jan 2015 - 30 Jun 2015
30%
1 Jul 2015 - 31 Dec 2015
25%
1 Jan 2016 - 31 Dec 2016
20%
Source: Energy Market Authority
Sembcorp Industries Limited (SCIL.SI / SCI SP)
15
22 September 2015
As shown in Figure 33, the average vesting contract price of S$146/MWh is at a 52% premium to the USEP of S$96/MWh in 1H15. While the average USEP rose above the vesting price for certain periods in 2Q09-1Q12, the average USEP has been consistently below the vesting price since 3Q12 as new generation capacity has been added to the market. As such, the decline in vesting contract levels is likely to lead to a further decline in blended power spreads. However, we do not expect a sharp deterioration from 1H15 as the decline will be moderating. Figure 33: Vesting contract levels will decline to 30% in 1H15, 25% in 2H15, and 20% in 2016, which is likely to lead to a fall in blended spreads 600
70%
500
60%
400
50%
300
40%
200
30%
100
20%
0 Jan-07
10% Jan-08
Jan-09
Vesting Price ($/MWh) (LHS)
Jan-10
Jan-11
Jan-12
Jan-13
Uniform Singapore Electricity Price ($/MWh) (LHS)
Jan-14
Jan-15
Vesting Contract Level (RHS)
Source: Energy Market Authority, Energy Market Company
Vesting contracts were implemented by the Energy Market Authority in January 2004 to control the exercise of market power by the generation companies and promote efficiency and competition in the electricity market. The vesting contracts commit the generation companies to sell a specified amount of electricity (vesting contract levels) at a specified price (the vesting contract price). As a result, it takes away incentives for the generation companies to exercise their market power by withholding their generation capacity to push up spot prices in the wholesale electricity market. Vesting contracts were allocated only to generation companies that had made their planting decisions before the decision in 2001 to introduce vesting contracts. A generation company’s allocation is made in proportion to the licensed capacity eligible for vesting contracts, as shown in Figure 34. Figure 34: Maximum capacity eligible for vesting contracts Genco
Maximum capacity (MW)
Seraya
3,100
Senoko
3,300
Tuas
2,670
Sembcorp
785
Keppel
470
PacificLight Power
800
Source: Energy Market Authority
Sembcorp Industries Limited (SCIL.SI / SCI SP)
16
22 September 2015
Medium-term upside from renegotiation of gas contracts In 2007, Singapore announced that it would procure LNG through a single buyer or aggregator, due to the small size of the market. BG was appointed as the first LNG aggregator with an exclusive franchise to import LNG for up to 3Mtpa or 2023, whichever is earlier. As of June 2014, BG has contracted for the sale of around 2.7 Mtpa of regasified LNG, representing about 90% of its exclusive franchise. A significant volume of the LNG has been contracted by the generation companies, including Senoko Energy, PowerSeraya, Tuas Power Generation, Sembcorp Cogen, Keppel Merlimau Cogen, Island Power and Tuaspring. Due to take-or-pay contracts, power generation companies have been unable to lower generation output to optimise profitability. We believe any scope for renegotiation of gas contracts with BG will lead to more sustainable power prices in the medium term. Figure 35: Import of Natural Gas 12000 10000
1043
2259
8000 6000 4000
8016
8096
2010
2011
8780
8831
2012
2013
8058
2000 0 Pipeline NG (ktoe)
2014
Liquefied NG (ktoe)
Source: EMA
Sembcorp Industries Limited (SCIL.SI / SCI SP)
17
22 September 2015
Marine re-balancing may take time Oil macro re-balancing taking longer Credit Suisse forecasts average Brent price of US$58/bbl and WTI of US$54/bbl in 2016. In our view, the short-reaction function on the oil balance’s supply side is now the US upstream, specifically the disparate universe of shale producers. We expect price to be low through the middle of 2016, which should keep global upstream activity depressed through 2016. With this curtailment, global supply should fall below demand next year. We expect WTI prices to be below US$65/bbl through 2017, the level from which oil production growth from America’s best shale basins would again accelerate to a pace that in short order would tilt the global balance into surplus. Only in the 2018-19 timeframe do we foresee oil prices rising above US$65/bbl WTI and US$70/bbl Brent, the lower end of the range in which big, multi-billion dollar oil prices (deepwater) attract Final Investment Decisions. In the longer run, we think higher prices will be required to fill the widening gap between emerging market-driven demand growth and decline rates. Figure 36: Credit Suisse oil price forecasts In US$/bbl
FY12A
FY13A
FY14A
1Q15A
2Q15A
3Q15
4Q15
FY15E
FY16E
FY17E Long-term
111.68
108.70
99.38
55.13
63.37
49.50
48.00
54.00
58.00
65.00
53.77
55.57
56.96
59.84
63.97
45.00
43.00
48.60
54.00
60.00
48.67
50.33
51.35
53.99
57.50
Brent Actuals & CS Forecast Futures Curves
75.00
WTI Actuals & CS Forecast
94.15
98.08
92.89
48.57
57.84
Futures Curves
70.00
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates
Figure 37: Credit Suisse expects Brent oil price to recover to US$70/bbl after 2017E 110 100
US$/bbl
90 80
70 60 50 40
3Q14A 4Q14A 1Q15A 2Q15A 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E 2017E 2018E 2019E Brent (actual)
Brent (forecast)
Futures
Source: Bloomberg, Credit Suisse estimates
Based on Credit Suisse's analysis of global oil and gas capex trends across more than 150 listed companies as well as non-listed National Oil Companies (NOCs), total capex (excluding Brazil and Australia) is currently expected to fall by 20% YoY in 2015, versus a 12% decline in 2009.
Sembcorp Industries Limited (SCIL.SI / SCI SP)
18
22 September 2015
Figure 38: Capex spending YoY change—2015 versus 2009 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% -40.0% -50.0%
2009/2008
2015/2014
Source: Company data, Credit Suisse estimates
Newbuild rig demand has been weak With the decline in capex and rig utilisation rates, newbuild rig orders have been weak. There have been four newbuild jackup orders YTD, most of which are related party or speculative orders with Chinese yards with the exception of a jackup order by National Drilling with Lamprell. There are 140 jackups scheduled for delivery through 2020. In particular, 2015 will see a record of 65 jackup units delivered. Figure 39: Newbuild jackup orders in 2015 Rig name Manager CIMC Raffles JU Tbn6 CIMC Raffles Offshore
Order date 14-Jan-2015
Delivery date 15-Nov-2016
Build yard Yantai CIMC Raffles
TZ400-2
Tai Zhong Binhai
23-Apr-2015
1-Aug-2017
Tai Zhong Bin Hai
NDC JU Tbn9
National Drilling
28-Apr-2015
1-May-2017
Lamprell
Alliance Offshore JU Tbn3
Alliance Offshore
1-Jul-2015
31-Jul-2017
CSSC Huangpu Wenchong Shipyard
Source: ODS-Petrodata
Figure 40: Jackup order schedule
Figure 41: Jackup delivery schedule 70
80 4 5
60
31
20
6 4 10 11 10 10 4 3 1 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD 15
14
Singapore
10
9
China
Korea
14
3
2
2
1
0
Others
Source: ODS-Petrodata, Credit Suisse estimates
Sembcorp Industries Limited (SCIL.SI / SCI SP)
10
2020
13
16
2019
29
22
21
15
2015
5 4
9
20
2014
8
4
2013
6 3
20
2012
26
24
2011
27
23
30
29
30
2010
9 1 8
7 4
6
2005
20
26
36 27
2009
30
4 5
2008
4 12
2007
36
40
40
2006
40
0
40
45
50
10
48
50
60
2018
70
2017
80
65
2016
90
Jackup delivery
Source: ODS-Petrodata
19
22 September 2015
Non-rig orders supporting order book Sembcorp Marine has won S$4.8 bn of non-rig orders since 2H14, representing close to 94% of all contracts secured over this period. This would include two mega-contracts, including a semisubmersible crane vessel from Heerema offshore worth US$1 bn, as well as three topsides for Maersk Oil North Sea worth more than US$1 bn. The only rig contract secured was a Pacific Class 400 jackup from BOTL in November 2014. Figure 42: Sembcorp Marine—non-rig orders since 2H14 Date
Value (S$ mn)
Description
Delivery
Owner
21-Jul-14
600
Conversion of 2 x FPSO from VLCC
1Q17, 3Q17
Saipem
23-Sep-14
241
LNG Process Modules Assembly
3Q16
Bechtel
13-Oct-14
884
Conversion of FPSO from Shuttle Tanker
3Q16
OOGTK Libra GmbH & Co KG
20-Oct-14
222
1x Offshore Substation Platform
4Q15 Siemens Transmission & Distribution Limited
1x FPSO Conversion
2Q16
MODEC
22-Apr-15
56
FSO conversion
2Q16
Teekay
15-Jul-15
1,350
DP3 semisub crane vessel
4Q18
Heerema Offshore
1-Sep-15
1,410
3x topside + EPC contract
2Q18
Maersk Oil North Sea UK
Source: Company data, Credit Suisse estimates
Order prospectus suggests some potential drillship and production equipment contracts in pipeline Despite the murky outlook for the rigbuilding market, the pipeline of potential contracts has not dried up completely. According to Upstream, Sembcorp Marine is in contention for three large projects, including a newbuild drillship from Anadarko, as well as production platforms from PTTEP and Hess. ■
Both Maersk Drilling and Seadrill have been shortlisted by Anadarko to provide a highend newbuild drillship with a 20,000 psi blowout preventer for long-term work in the Gulf of Mexico. It was reported that Seadrill has chosen Sembcorp Marine’s Jurong Shipyard as its preferred shipyard. While there is ample supply of uncontracted drillships, Anadarko may be interested in a newbuild unit due to challenging highpressure reservoirs for which no existing rigs are rated. The contract is scheduled to be awarded in 2H15, but we think delays are likely due to the weak market environment.
■
Sembcorp Marine’s SMOE is reported to be bidding for the engineering, procurement and construction contract to provide for wellhead platforms for Phase 1C of PTTEP’s Zatwika project off Myanmar. Other bidders include Thailand’s Cuel, Japan’s Nippon Steel and Sumikin Engineering, Hyundai Heavy Industries of South Korea, Malaysian duo SapuraKencana and Malaysia Marine & Heavy Engineering, and China’s Offshore Oil Engineering Company (COOEC). The tender is expected to be launched at the end of 2015, and awarded in 2Q16 for delivery between 4Q17 and 1Q18. Based on the US$367 mn contracts awarded to COEEC in 2014 for the construction of four wellhead platforms for Zawtika Phase 1B, we estimate the value of this contract to be about US$400 mn.
■
Sembcorp Marine, partnering with Saipem, is one of four groups short-listed to bid for a large semisubmersible production platform for the Equus deep water gas project off the coast of Western Australia from Hess. Other bidders include Worley-ParsonsIntecSea with HHI, Modec and Wood Group Mustang with SHI, and KBR. The bids are due for submission in early October 2015. The semisub production platform will have topside weight of about 15,000 tonnes and a hull of up to 25,000 tonnes.
Sembcorp Industries Limited (SCIL.SI / SCI SP)
20
22 September 2015
Figure 43: Pipeline of contracts for Sembcorp Marine Type
Project
Client
Location
Start date
Anadarko
Seadrill
GoM
2H18/1H19
2H15
Phase 1C of Zawtika project
PTTEP
Myanmar
2H17/1Q18
2Q16
Equus deep-water gas project
Hess
Western Australia
Not known
Not known
Drillship 4x platforms Semisub Production Platform
Expected award date
Source: Upstream, Credit Suisse
Sembcorp Marine's order book should provide revenue coverage for next 1.5 years Figure 44: YTD new orders has exceeded 2009 12.0
Figure 45: Order book of S$10.9 bn as of June 2015 14.0
11.0
12.7
12.3 11.4
12.0
10.0
10.0
8.0
8.0
5.7
5.4
6.0 4.2 4.0
4.2
3.7
3.1
4.2
3.0
2.0
6.0
7.0 5.5
5.5
4.4 2.5
2.5
3.0
10.9
9.0
5.1
4.0
1.2
2.0
0.0
0.0 2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
2006
2007
2008
2009
New orders (S$ bn)
2010
2011
2012
2013
2014
2015
Order book (S$ bn)
Source: Company data, Credit Suisse estimates
Source: Company data
Sembcorp Marine has a net order book of S$10.9 bn as of June 2015, higher than its order book of S$9.0 bn as of December 2008. Based on the scheduled delivery, 71% of the order book will be recognised cumulatively in 2015-17. Including the contract worth more than US$1 bn with Maersk Oil for the construction of three North Sea topsides secured in September, Sembcorp marine's order book would be even higher. Figure 46: Sembcorp Marine—revenue recognition on existing order book (S$ bn)
2H15
2016
2017
2018
2019
2020
Total
Jack-ups
0.7
0.4
0.0
0.0
0.0
0.0
1.1
Deepwater rigs
0.4
0.7
0.8
0.7
0.3
0.0
2.9
Conversion & SMOE
1.2
0.9
0.2
0.0
0.0
0.0
2.4
Sete Brasil drillships
0.1
1.0
1.2
1.0
0.8
0.3
4.5
Total
2.4
3.0
2.3
1.8
1.1
0.3
10.9
22%
28%
21%
16%
10%
3%
% of order book
Source: Company data, Credit Suisse estimates
Rig removal accelerating, but re-balancing will take longer Rig replacement cycle driving medium-term demand for newbuild jack-ups We expect demand for newbuild jack-ups to remain firm in the medium term, supported by replacement of older units. At the end of 2014, 298 of the existing fleet of 542 jackups (55%) are 25 years and above, and 123 units (23%) are 35 years and above. Looking ahead to 2020, 285 jackups will be 35 years and above. This would represent 42% of the global fleet assuming all 140 jackups on order are delivered and no further orders are placed. Assuming conservatively that demand is maintained at the end-2014 level, we estimate that 120 jackups have to be removed cumulatively between 2015 and 2020 to keep utilisation of the global jackup fleet above 80% in 2020. We believe this is achievable given 26 jackups removed YTD (including cold-stacked units), as well as 285 jackup 35 years and above.
Sembcorp Industries Limited (SCIL.SI / SCI SP)
21
22 September 2015
Figure 47: Jackup demand and supply model Year
2007
2008
2009
2010
2011
2012
2013
2014 2015E 2016E 2017E 2018E 2019E 2020E
Supply Fleet - BOY
398
413
439
456
478
482
481
514
542
587
615
617
599
Jackup Additions
16
30
24
23
17
14
41
32
65
48
22
2
2
1
Jackup Removals
1
4
7
1
13
15
8
4
20
20
20
20
20
20
413
439
456
478
482
481
514
542
587
615
617
599
581
562
Contracted
369
390
341
338
356
388
428
451
393
404
417
429
442
455
Demand Growth
2%
6%
-13%
-1%
5%
9%
10%
6%
-13%
3.0%
3.0%
3.0%
3.0%
3.0%
Utilisation rate
91%
91%
76%
72%
74%
81%
86%
85%
70%
67%
68%
71%
75%
80%
Fleet- EOY
581
Demand
Source: ODS-Petrodata, Credit Suisse estimates
Figure 48: Age of global jackup fleet 80 72 70 60
55
50 41 40
35 29
30 20
29 23 20 16 15 14 10
14
10
21 9 5 343
1
3
5
7
4
23
2
4 55 23211 2
19
8
14 11 11
9 4
23
3
1
1
1
1
9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57
Source: ODS-Petrodata, Credit Suisse estimates
We have started to see some of the major drillers, including Diamond Offshore, Hercules Offshore and Transocean, write down assets and stack rigs, and would expect this to continue. In total, 26 jackups have been removed from the marketable fleet YTD, including 17 units cold-stacked, 7 units retired, and 2 units scrapped.
Sembcorp Industries Limited (SCIL.SI / SCI SP)
22
22 September 2015
Figure 49: Jackups attrition since Jan 2015 Rig name
Manager/ Contractor
Attrition Date
Location
Status
Rowan Louisiana
Rowan
10-Jan-2015
USA
Cold stacked
Hercules 214
Hercules Offshore
19-Jan-2015
USA
Cold stacked
Hercules 253
Hercules Offshore
20-Jan-2015
USA
Cold stacked
ENSCO 82
Ensco
21-Jan-2015
USA
Cold stacked
ENSCO 58
Ensco
28-Jan-2015
Middle East
Cold stacked
ENSCO 81
Ensco
17-Feb-2015
USA
Cold stacked
Paragon B153
Paragon Offshore
19-Feb-2015
W Africa
Retirement
Hercules 120
Hercules Offshore
20-Feb-2015
USA
Cold stacked
Dolphin 106
Nabors
3-Mar-2015
US GOM
Retirement
Dolphin 109
Nabors
3-Mar-2015
US GOM
Retirement
Dolphin 110
Nabors
3-Mar-2015
US GOM
Retirement
P-54
Nabors
3-Mar-2015
US GOM
Retirement
Petrobras V
Petrobras
23-Mar-2015
S America
Scrapped
GSF Galaxy III
Transocean
25-Mar-2015
NW Europe
Cold stacked
ENSCO 91
Ensco
15-Apr-2015
Middle East
Cold stacked
Energy Endeavour
Northern Offshore
12-May-2015
NW Europe
Cold stacked
Ocean Spur
Diamond Offshore
15-May-2015
SE Asia
Cold stacked
GSF Monarch
Transocean
1-Jun-2015
NW Europe
Cold stacked
Ocean Nugget
Diamond Offshore
10-Jun-2015
US GOM
Cold stacked
Paragon M823
Paragon Offshore
25-Jun-2015
US GOM
Cold stacked
Paragon L1114
Paragon Offshore
30-Jun-2015
US GOM
Cold stacked
Rowan Alaska
Rowan
1-Jul-2015
US GOM
Retirement
Rowan Juneau
Rowan
1-Jul-2015
US GOM
Retirement
ENSCO 56
Ensco
13-Jul-2015
SE Asia
Cold stacked
Maersk Endurer
Maersk Drilling
14-Jul-2015
W Africa
Scrapped
Paragon M821
Paragon Offshore
30-Jul-2015
US GOM
Cold stacked
Source: ODS-Petrodata
Marine balance sheet is greatest risk With a further working capital outflow of S$514 mn and capex of S$216 mn in 2Q15, Sembcorp Marine’s net debt increased further to S$1.66 bn (net gearing 0.5x) as of June 2015. Excess of progress billing over WIP has declined to S$0.7 bn in June 2015 from a peak of S$1.6 bn in March 2014. Figure 50: Working capital outflow of S$2.0 bn since 1Q14, with cumulative capex of S$1.2 bn Excess of progress billing over WIP (S$ mn) Net debt/ cash (S$ mn) Operating profit before WC changes
1Q14
2Q14
3Q14
4Q14
1Q15
1,619
1,569
1,206
1,005
917
2Q15 Cumulative 721
-1,472
-883
90
663
908
1,655
180
185
198
287
173
196
1,220
507
-84
-856
-925
86
-249
-1,520
57
-63
4
-21
-94
-337
-454
-43
-232
79
308
-182
72
3
-138
-168
-217
-216
-222
-216
-1,177
Changes in working capital: Inventories and WIP Trade and other receivables Trade and other payables Purchase of PPE Source: Company data, Credit Suisse estimates
Sembcorp Industries Limited (SCIL.SI / SCI SP)
23
22 September 2015
Figure 51: Net debt has increased to S$1.7 bn as of June
Figure 52: Excess of progress billing over WIP (S$ mn)
2015 2,000
1,800
1,655
1,500 1,000
663
500
1,000
-500
871
800 -1,166
-1,500 -2,000
1,271
-1,589
-2,500
-933
-1,076
-1,224 -1,227 -1,125
-883
-929
1,206
1,200
0
-1,000
1,569
1,441
1,400
90
1,619
1,614
1,600
908
600
-1,472
917 721
629
582 462
422
400
-1,864 -1,955 -1,804
1,005
907
884
352
429
200
-3,000 -2,708 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15
1Q11
3Q11
1Q12
Net debt/ Cash (S$ mn)
3Q12
1Q13
3Q13
1Q14
3Q14
1Q15
Excess of progress billing over WIP (S$ mn)
Source: Company data
Source: Company data
Working capital outflow likely to continue We do not expect a reversal of the working capital outflow in 2H15 as customers continue to request for delay in delivery for rigs under construction. As seen in Figure 53, Sembcorp Marine was supposed to deliver nine rigs in 2015, of which only two have been delivered to Oro Negro and Japan Drilling. Four rigs for Oro Negro, North Atlantic Drilling and Hercules Offshore have been delayed to later in 2015, but we expect challenges in delivery of these units. The Arpoador drillship for Sete Brasil is expected to be delivered beyond 2015 from a delivery of July 2015 previously. Figure 53: Status of Sembcorp Marine rigs to be delivered in 2015 Rig Name
Status
Order Date
Initial Delivery Date
Manager
Rig Type
Impetus
Delivered on time
18-Mar-2013
8-Jan-2015
Oro Negro
Jackup
Hakuryu-12
Delivered on time
30-May-2013
31-Jan-2015
Japan Drilling
Jackup
Vastus
Delayed to later in 2015
18-Mar-2013
31-Mar-2015
Oro Negro
Jackup
West Rigel
Delayed to later in 2015
28-Mar-2012
15-Nov-2014
North Atlantic Drilling
Semisubmersible
Perisai Pacific 102
Delayed to later in 2015
28-Feb-2013
1-Apr-2015
Hercules Offshore
Jackup
Supremus
Delayed to later in 2015
1-Jul-2013
30-Jul-2015
Oro Negro
Jackup
Delayed beyond 2015
11-Feb-2011
31-Jul-2015
Petrobras
Drillship
Delayed to later in 2015
1-Jul-2013
30-Sep-2015
Oro Negro
Jackup
On schedule
1-Nov-2013
30-Nov-2015
Marco Polo Drilling
Jackup
Arpoador Animus Marco Polo JU Tbn1
Source: Company data, Credit Suisse estimates
As seen in Figure 54, Sete Brasil, Oro Negro, Petrobras, Perisai, Hercules and Marco Polo represent about 60% of Sembcorp Marine’s order book as of June 2015. Figure 54: Sembcorp Marine—breakdown of order book (June 2015) MODEC Teekay Helix OOGTK Libra Saipem1% 0% 3% Prosafe 5% 4% 2% Perisai Petrobras 3% NAD 5% 4% Oro Negro BOT Lease 5% 2% Noble 4% Transocean 8% Sete Brasil 42%
Marco Polo 2%
Hercules 2%
Heerema Offshore 8%
Source: Company data, Credit Suisse estimates
Sembcorp Industries Limited (SCIL.SI / SCI SP)
24
22 September 2015
■
Oro Negro: Oro Negro placed a total of six jackups with PPL Shipyard, of which three have been delivered. With Pemex reducing its 2015 budget by 14% to US$23.5 bn, Oro Negro has been negatively impacted by rate cuts for four rigs which were originally chartered to Pemex for US$160,000/day each. According to Oro Negro, Pemex has renegotiated the rates for these four jack-ups to US$130,000/day, representing a 19% decline in day rates from 1 June 2015 to 31 May 2016. Subsequently, the day rates may return to approximately US$160,000/day. Upstream also reported that Oro Negro is currently negotiating with Sembcorp Marine to delay the delivery of the remaining jackups.
■
North Atlantic Drilling Limited (NADL): In April 2015, NADL announced a two-year delay in the closing of a framework co-operation agreement with Rosneft, whereby NADL was supposed to deliver five semi-submersibles to Rosneft. This includes the West Rigel, a US$568 mn harsh-environment ultra-deepwater semi-submersible rig ordered in April 2012 with Sembcorp Marine’s Jurong Shipyard, with expected delivery in 2Q15. With the delay and potential cancellation of the agreement with Rosneft, NADL will have to look for alternative opportunities for the five semi-submersibles.
■
Hercules Offshore: On 13 August, Hercules Offshore filed for bankruptcy in the US. Under its pre-packaged plans, Hercules Offshore will obtain US$450 mn of new debt financing from holders of its senior notes to fully fund the remaining construction cost of ‘Hercules Highlander’, the US$236 mn jack-up rig ordered by its subsidiary Hercules North Sea from Sembcorp Marine’s Jurong Shipyard with delivery scheduled for 2Q16. It expects to re-emerge from bankruptcy by 7 November with a restructured balance sheet. Hercules Offshore was also appointed the manager for Perisai Pacific 102 which is under construction at PPL Shipyard with delivery scheduled in 2Q15. Perisai ordered the jackup rig in February 2013 for US$208 mn.
■
Marco Polo Marine: Specialising in the charter of offshore supply vessels, Marco Polo Marine established a Rig Division as part of its plans to diversify its business. In February 2014, Marco Polo Marine ordered a jackup rig scheduled for delivery in 4Q15 from PPL Shipyard worth US$214.3 mn, with options for two more jack-ups. Management noted that the construction of the jack-up is progressing as planned.
Construction of Sete Brasil drillships could lead to further working capital outflow Valor reported that the restructuring of Sete Brasil is progressing with US$4 bn of new loans raised and a further US$1.2 bn under negotiation from new investors in Asia. This should finance the construction of up to 19 units, with Keppel and Sembcorp Marine retaining their contracts for six semisubs and seven drillships, respectively. Two of the remaining units are due to be constructed by local yard ERG, and four rigs could be transferred to a new company owned by Odebrecht and Kawasaki. It was also suggested that of the Singapore yards' 13 units, four could be financed directly by Keppel and Sembcorp Marine, which each yard paying for the construction of two units. Sete Brasil would raise more long-term funding to make the remaining payment when the rigs are scheduled for completion in 2018-19. Sembcorp Marine could be more significantly impacted by the potential change in payment terms. Assuming that Sembcorp Marine is asked to finance two drillships and there is no further working capital requirements including for Transocean drillships, its net gearing could go up to 1.3x. Figure 55: Status of construction of Sete Brasil drillships Batch 1
Shipyard
Strike Steel
Physical completion Feb 15 Mar 15 81.47% 81.47%
May 15 81.47%
Scheduled delivery Jun-15
Local content 55% 55%
Arpoador
EJA
Oct-11
Dec 14 81.20%
Guarapari
EJA
May-13
58.76%
61.79%
61.79%
61.79%
Jul-16
Camburi
EJA
Feb-14
34.81%
35.72%
35.72%
35.72%
Dec-16
Itaoca
EJA
Oct-14
16.13%
16.32%
16.32%
16.32%
Aug-17
60% 60%
Source: Sete Brasil
Sembcorp Industries Limited (SCIL.SI / SCI SP)
25
22 September 2015
Capex programme tapering We expect capex for Sembcorp Marine to taper from 2H15, reaching S$750 mn in 2015 from S$772 mn in 2014. This will fall further to S$400 mn in 2016. Most of the outstanding capex will be for remaining works at its Brazilian yard, steel fabrication facility and well as Phase two of Tuas integrated yard in Singapore. Sembcorp Marine noted that it will continue with its capex in Singapore as it has been integral in helping the company secure some recent large orders (Transocean drillships, Heerema crane semisub). Figure 56: Sembcorp Marine—capex In S$ mn
2010
2011
2012
2013
2014
21
236
295
366
36
0
13
37
370
514
Singapore New Yard Phase 1 Brazil New Yard Steel fabrication facility
1H15
2015E
2016E
240
350
100
89
Singapore new yard Phase 2
2017E
133
49
144
196
196
49
Others
77
223
204
79
83
37
71
104
150
Marine
98
472
536
815
772
420
750
400
199
Source: Company data, Credit Suisse estimates
Sembcorp Industries Limited (SCIL.SI / SCI SP)
26
22 September 2015
Upgrade to OUTPERFORM Increase target price to S$4.20 from S$3.80 Our target price of S$4.20 is based on a SOTP of the following: ■
Marine business based on our target price of S$2.60, valuing the O&M business at 2016 P/E of 12x.
■
Ex-Marine business based on a P/B of 1.1x, in line with its historical average. This will imply a 2016 P/E of 9x, also in line with its historical average.
Figure 57: Sembcorp Industries—SOTP valuation Equity value per share
Methodology
Sembcorp Marine
1.84
CS target price of S$2.60
Unlisted businesses
2.24
9x 16E unlisted business PATMI
Gallant Venture
0.07
Marked to market
Total
4.15
SOTP rounded to S$4.20
Source: Credit Suisse estimates
Raising 2016 and 2017 Utilities net profit We increase our 2016E Utilities net profit to S$383 mn from S$369 mn, and our 2017E Utilities net profit to S$434 mn from S$404 mn. This is driven by our detailed forecasts for India discussed above, as well as our expectation of no significant further deterioration in Singapore power profit. Figure 58: SCI—Utilities net profit Net profit
2011
2012
2013
2014
Singapore
1Q14 2Q14
3Q14
4Q14
1Q15 2Q15 3Q15E 4Q15E 2015E 2016E 2017E
183
263
226
217
53
47
61
57
31
36
55
37
159
146
China
28
32
70
71
17
17
14
23
20
25
19
19
82
85
85
Rest of Asia and Australia
33
50
45
64
12
13
20
18
12
9
18
26
64
107
142
Middle East & Africa
26
30
37
42
7
14
10
12
9
14
11
11
44
46
48
UK
31
15
-39
24
4
6
9
5
5
10
2
2
20
12
16
The Americas
10
8
5
11
2
2
3
5
4
3
2
2
11
11
11
Others
-7
-23
105
-21
-3
-6
-3
-9
-7
45
-7
-7
-30
-25
-25
304
375
450
408
92
93
114
110
75
142
100
90
351
383
434
Total
156
Source: Company data, Credit Suisse estimates
Utilities earnings cuts likely to be reversed Our Utilities net profit forecast of S$383 mn in 2016E and S$434 mn in 2017E is above consensus expectations of S$378 mn and S$425 mn, respectively. We are comfortable with a S$32 mn sequential increase in Utilities net profit in 2016E and a further S$50 mn in 2017E, driven by the following: ■
TPCIL, India (completion in 2015): S$41 mn contribution in 2016E.
■
NCCPP, India (completion in 2016): S$34 mn contribution in 2017E.
■
Changzhi total water plant, China (completion in 2015): S$6 mn contribution in 2016E.
■
Energy from Waste facility, Singapore (completion in 2016): S$6 mn contribution in 2017E.
■
Wilton 10 Energy from Waste facilities, Singapore (completion in 2016): S$5 mn contribution in 2017E.
Sembcorp Industries Limited (SCIL.SI / SCI SP)
27
22 September 2015
Consensus FY16 EPS for SCI has been reduced by 20% since January 2015, mainly driven by a reduction in Marine estimates, which have been lowered by 28% YTD. Utilities 2016 net profit has also been reduced by 15% YTD. We expect this to be reversed following the 3Q15 results. Figure 59: Credit Suisse vs Consensus Utilities net profit
Figure 60: Consensus FY16 EPS for SCI and SMM have
forecasts
been reduced by 20% and 28%, respectively
460
100.00 434
440
95.00
425
420
90.00
400
85.00
383
378
380
360
80.00 75.00
351 340
340
70.00 65.00
320
60.00 1-Jan-15
300 2015E
2016E Credit Suisse
2017E
1-Feb-15
1-Mar-15
1-Apr-15
1-May-15
SCI Consensus FY16 EPS
Consensus
Source: Bloomberg, Credit Suisse estimates
1-Jun-15
1-Jul-15
1-Aug-15
1-Sep-15
SMM Consensus 2016 EPS
Source: Bloomberg
With the increased contribution from India and a bottoming in Singapore Utilities profit, we expect an 11% CAGR in Utilities net profit in 2015-17E. This will help to offset a decline in Marine net profit with the decline in newbuild orders. Figure 61: TPCIL and NCCPP to drive 11% CAGR in
Figure 62: Growth in Utilities net profit will help to offset
Utilities net profit in 2015-17E
decline in Marine 900
500 450 400
383 351
350 300
434
408
41
34 42
192
196
202
733
44 663
50
781 50
44 340
500
291
259
288
400
200
300
150 100
801
700 600
191
250
800
200
217
159
146
156
2015E
2016E
2017E
50
408
383
351
434
100 0
0 2014A
Singapore
Others
TPCIL
NCCPP
Source: Company data, Credit Suisse estimates
2014A Utilities
2015E Marine
Urban Development
2016E Others/Corporate Costs
2017E Sembcorp Industries
Source: Central Electricity Authority (India)
Potential upside from further investments or recovery in Singapore power Our forecasts do not incorporate the following: ■
Increase in stake in NCCPP: Sembcorp Industries intends to increase its stake in NCCPP from 49% to above 65% following conditional agreements signed to give Sembcorp the right and obligation to take an incremental stake in NCCPP, subject to the project obtaining requisite formal approvals by relevant authorities in India. We expect contribution from NCCPP to be similar to TPCIL should its stake be increased to 65%.
■
Organic growth from Sembcorp Green Infra: Sembcorp also owns 64.06% in Sembcorp Green Infra (SGI) a renewable energy company which has a portfolio of wind and solar assets in six renewable resource-rich states in India. SGI’s portfolio has expanded to 757 MW, of which 614 MW is currently in operation, increasing to 673 MW by September 2015. Management aims to triple capacity to more than 2000 MW by 2020. We do not incorporate any earnings contribution beyond that generated by existing capacity.
Sembcorp Industries Limited (SCIL.SI / SCI SP)
28
22 September 2015
■
Recovery in Singapore power market: We forecast Singapore Utilities net profit of S$159 mn in 2015, S$146 mn in 2016 and S$156 mn in 2017. This is based on a slight deterioration in blended power spreads in 2016 as vesting contract levels are reduced to 20%, and contribution from its WTE plant in 2017. Any improvement in power spreads with a renegotiation of gas contracts by generation companies could drive potential upside to our Singapore Utilities net profit forecasts.
Current share price values Utilities below 1x P/B After stripping out S$803 mn of perpetuals, we estimate the book value of Sembcorp Industries to be close to S$3.17 per share, of which S$1.11 relates to Marine and S$2.06 relates to ex-Marine (including Utilities and Urban Development). Marine valuation ■
Based on the Sembcorp Marine current share price of S$2.40, Marine would be trading at a P/B of 1.59x. vs its 2008/09 low of 1.7x.
■
Based on the Sembcorp Marine current share price of S$2.40, Marine would be trading at a 2016 P/E of 10.9x, vs its historical average of 15.4x.
Figure 63: Sembcorp Marine—historical P/B
Figure 64: Sembcorp Marine—historical P/E 30.00
7.00
25.00
6.00
5.00
20.00
4.00
15.00
3.00
10.00
2011 low: 2.55x
2.00
08/09 low: 1.73x
1.00 0.00 Dec-95
5.00
current: 1.59x
0.00 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
Dec-97
Dec-99
Dec-01
Dec-03
Dec-05
Dec-07
Dec-09
Dec-11
Dec-13 P/E
SMM P/B
Source: Bloomberg, Company data, Credit Suisse estimates
Average
+ 1 SD
- 1 SD
Source: Bloomberg, Company data, Credit Suisse estimates
Ex-Marine valuation ■
Stripping out Marine, SCI ex-Marine is currently trading at a P/B of 0.9x. vs its historical average of 1.1x
■
Stripping out Marine, SCI ex-Marine is currently trading at a P/E of 7.9x, vs its historical average of 9.2x
Figure 65: Ex-Marine P/B
Figure 66: Ex-Marine P/E
3.5
18.0
3.0
16.0
2.5
14.0
2.0
12.0
1.5
10.0
1.0
8.0
0.5 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14
6.0
25
20
15
10
P/B
Average P/B
ROE - RHS
Source: Company data, Credit Suisse estimates
Sembcorp Industries Limited (SCIL.SI / SCI SP)
5
0 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 P/E
Average
+1 std dev
-1 std dev
Source: Company data, Credit Suisse estimates
29
22 September 2015
Ex-Marine has consistently been making ROEs above or close to 10% We believe a P/B of 1.1x for the Ex-Marine is justifiable, as it has consistently been making ROE above 10% and its cost of equity. Despite the negative power spreads in Singapore in 1H15, Ex-Marine underlying ROE was at 9.8%. Including S$55 mn gain from disposal of Bournemouth Water, annualised ROE would be at 10.9%. We expect ROE to improve from 2016E driven by the stabilisation of Singapore power market and increasing contribution from India. Figure 67: Ex-Marine ROE has been consistently above or close to 10% 25.0%
20.0%
22.2%
17.0%
15.0%
13.9%
12.5%
10.0%
12.0%
12.4%
2009
2010
13.7%
14.6%
14.5%
13.2% 1.1% 9.8%
5.0%
0.0% 2005
2006
2007
2008
Ex-Marine ROE
2011
2012
2013
2014
1H15
Divestment gain
Source: Company data, Credit Suisse estimates
Figure 68 shows the sensitivity to target price from different P/B assumptions of the Marine and Ex-Marine businesses. Assuming an ex-Marine P/B of 1.1x, we believe the market is currently pricing in a Marine P/B of 1.2x. Figure 68: Sensitivity of valuation to ex-Marine P/B and Marine P/B Ex-Marine P/B Marine P/B
0.8
0.9
1.0
1.1
1.2
1.3
1.4
0.8
2.54
2.74
2.95
3.15
3.36
3.57
3.77
0.9
2.65
2.85
3.06
3.26
3.47
3.68
3.88
1.0
2.76
2.96
3.17
3.38
3.58
3.79
3.99
1.1
2.87
3.07
3.28
3.49
3.69
3.90
4.10
1.2
2.98
3.19
3.39
3.60
3.80
4.01
4.22
1.3
3.09
3.30
3.50
3.71
3.91
4.12
4.33
1.4
3.20
3.41
3.61
3.82
4.03
4.23
4.44
1.5
3.31
3.52
3.72
3.93
4.14
4.34
4.55
1.6
3.42
3.63
3.84
4.04
4.25
4.45
4.66
1.7
3.53
3.74
3.95
4.15
4.36
4.56
4.77
1.8
3.64
3.85
4.06
4.26
4.47
4.68
4.88
1.9
3.76
3.96
4.17
4.37
4.58
4.79
4.99
2.0
3.87
4.07
4.28
4.48
4.69
4.90
5.10
Source: Credit Suisse estimates
Discount to regional Utilities peers SCI is currently trading at 2016 P/E of 8.7x, while its ex-Marine stub is trading at FPE of 7.9x. This is at a sharp discount to the India average of 11.4x, and the NJA average of 11.9x. On a P/B basis, SCI is trading at a P/B of 1.1x, while its ex-Marine stub is trading at a P/B of 0.9x, also at a discount to regional peers.
Sembcorp Industries Limited (SCIL.SI / SCI SP)
30
22 September 2015
Figure 69: SCI trading at a discount to regional peers on
Figure 70: SCI trading at a discount to regional peers on
2015 and 2016 P/E
P/B vs ROE
20.0
4.0
17.917.5
18.0 16.0
14.4
9.6
10.0
10.3 8.7
11.1 10.4
11.7
11.511.1
16.0
3.0
14.0
12.0
20.0
3.5
11.9 10.5
11.711.4
12.011.8
2.5
9.2
12.0
2.0
8.0
8.0
1.5
6.0
1.0
4.0
4.0
0.5
2.0 0.0
0.0
SCI
JSW
ASEAN Average
NTPC
PGCIL
P/E 15E
India Average
NJA Average
China Average
HK Average
0.0 SCI
NTPC
India Average
NJA Average
P/E 16E
China Average
P/B 15E
Source: Thomson-Reuters, Credit Suisse estimates
JSW
HK Average
ASEAN Average
PGCIL
ROE 15E - RHS
Source: Thomson-Reuters, Credit Suisse estimates
Attractive dividend yield of 4.5% Sembcorp strives to provide consistent and sustainable ordinary dividend payments to its shareholders, and maintained its interim DPS at S$0.05. While there are market concerns that Sembcorp could cut its dividend following a reduction in Sembcorp Marine, we believe this could be partially offset by divestment gains from Bournemouth, Zhumadian and SembSita. As such, we expect the company to be able to maintain its total DPS of S$0.16 in 2015-17, implying a dividend yield of 4.5%. Figure 71: Dividend payout (in Singapore cents) 20.00
50
18.00 16.00
48 2.00
2.00
14.00
-
2.00
-
-
-
-
44
12.00
42
11.00
10.00 8.00
15.00
15.00
15.00
11.00
11.00
11.00
40 38
15.00
6.00
36
4.00
34
2.00 -
46
2010A
2011A
Interim ordinary dividend
2012A
2013A
Final ordinary dividend
5.00
5.00
5.00
5.00
2014A
2015E
2016E
2017E
32 30
Bonus dividend
Total distribution payout ratio (%) - RHS
Source: Company data, Credit Suisse estimates
HOLT suggests 50% potential upside if margin can be maintained Sembcorp Industries screens as a Contrarian stock in the HOLT framework, exhibiting a high CFROI profile relative to sector peers and attractive valuation. However, its momentum is poor as the share price has corrected over the last 18 months in line with its weak CFROI revisions (earnings momentum). Over the last three months, its CFROI revisions have also remained weaker relative to peers.
Sembcorp Industries Limited (SCIL.SI / SCI SP)
31
22 September 2015
Leveraging on IBES consensus sales growth and EBITDA margins assumption in 2015 and 2016, the company is currently priced for no sales growth and further deterioration in EBITDA margins from 15% 7.5% in 2017 to 2019. The implied EBITDA margins are below the company’s ten-year trough level seen in the mid-2000s. Link to HOLT scenario If Sembcorp Industries can maintain its margin at 15% (in line with 2016 consensus forecast) from 2017-19, there is a 50% potential upside on the same zero sales growth assumption. Figure 72: Sembcorp Industries has a 50% potential upside if margins can be maintained at IBES 2016 consensus forecast of 15%
Source: Credit Suisse HOLT. What are HOLT Investment Styles?
Sembcorp Industries Limited (SCIL.SI / SCI SP)
32
22 September 2015
Key risks include a deterioration in SMM balance sheet Low corporate net debt Preference share issuance has strengthened balance sheet In May 2015, Sembcorp Industries issued S$600 mn of 4.75% subordinated perpetual securities under its S$2 bn Multicurrency Debt Issuance programme. As this is accounted for as equity on the balance sheet, Sembcorp Industries’ net gearing was 0.50x as of June 2015. While Sembcorp Marine’s net debt increased from S$0.7 bn in December 2014 to S$1.7 bn in June 2015, SCI’s net debt (ex-Marine) remained stable at about S$2.4-2.5 bn during this period, of which S$2.0 bn relates to project finance debt. Figure 73: SCI and SMM debt 30/6/2015
31/12/2014
Gross debt
5,845
4,743
Corporate debt
1,352
1,322
Project finance debt
2,032
1,680
Sembcorp Marine debt
2,461
1,741
(1,717)
(1,661)
Net debt/ (cash)
4,128
3,082
Equity
8,246
7,232
0.50
0.43
SCI
Less: Cash and cash equivalents
Net gearing SMM Sembcorp Marine debt
2,461
1,741
Less: cash and cash equivalent
(806)
(1,079)
Net debt/ (cash)
1,655
662
Equity
3,220
3,132
0.51
0.21
Gross debt
3,384
3,002
Less: cash and cash equivalents
(911)
(582)
Net debt/(cash)
2,473
2,420
Net gearing SCI excluding Marine
Source: Company data
Privatisation could lead to a surge in gearing or could be earnings dilutive Based on Sembcorp Marine’s current share price of S$2.40 and assuming a 10% premium, Sembcorp Industries would require S$2.1 bn to privatise Sembcorp Marine. In the scenario of an all cash offer, and assuming an interest cost of 4%, Sembcorp Industries’ 2016 EPS could be boosted by about 14%. However, this would raise the company’s net gearing to close to 1x, which is at the top of the range in which we believe the company is comfortable with.
Sembcorp Industries Limited (SCIL.SI / SCI SP)
33
22 September 2015
Figure 74: Scenario 1—all cash offer 2015E
2016E
86
86
86
Consensus SMM earnings
464
456
418
Increase in earnings
181
178
163
Net increase in earnings
95
92
77
Consensus SCI earnings
703
708
707
39
39
40
798
800
784
45
45
44
15%
14%
11%
1,784
1,784
1,784
Interest expense at 4%
Consensus SCI EPS New SCI net profit New SCI EPS Change in EPS Number of shares
2017E
Source: Bloomberg, company data, Credit Suisse estimates
In the scenario of an all-share offer, 2016 EPS could be diluted by 6%, though gearing could remain unaffected. Hence, the Sembcorp Industries could instead do a part-sharepart-cash offer to have a better balance between earnings accretion and keeping its net gearing low. Figure 75: Scenario 2—all shares offer New SCI net profit
2015E 884
2016E 886
2017E 870
37
37
36
-5%
-6%
-8%
2,387
2,387
2,387
New SCI EPS Change in EPS Number of shares
Source: Company data, Credit Suisse estimates
Risk from financial difficulties faced by JAC According to the Straits Times, JAC was unable to service its interest payments and is negotiating a debt restructuring. JAC obtained US$1.56 bn financing from ten participating banks in April 2011, with 80% of the debt guaranteed by agencies of the South Korean government. Suppliers, including BP, SK Energy and Glencore, have also filed claims against the company. Attempts to restart the plant has been hampered by its complicated shareholding structure, consisting of stakeholders including feedstock suppliers and product off-takers. JAC operates one of the world’s largest petrochemical plants on Jurong Island. The plant started production in September 2014 with a target to produce 1.5 mn tonnes of aromatics and 2.5 mn tonnes of transportation fuels per annum. It is one of Sembcorp Industries’ key customers at its Sembcorp Banyan multi-utilities facilities in Jurong Island, taking up a significant portion of steam capacity when it started operations. However, operations were stalled since December 2014 after it ran out of working capital due to poor market conditions amid the oil price decline. In the worst case scenario, difficulties in resolving the financial challenges faced by JAC and further delay in payment could lead to potential provisions taken by Sembcorp. However, Sembcorp management remains confident of the long-term viability of the plant, and believes the risk of a writedown is low.
Sembcorp Industries Limited (SCIL.SI / SCI SP)
34
22 September 2015
Figure 76: Shareholding structure of JAC Shareholders
Shareholding
SK International Investment
30.0%
Jiangsu Sanfangxiang Group
25.0%
Vijay Goradia
10.5%
Glencore International
10.0%
Shefford Investments
9.5%
Thai KK Industry Co
5.1%
EDB Investments
5.0%
Essar Projects (India)
4.9%
Source: Company data
Sembcorp Industries Limited (SCIL.SI / SCI SP)
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Companies Mentioned (Price as of 21-Sep-2015) AP Moller Maersk (MAERSKb.CO, Dkr10660.0) Aboitiz Power Corp (AP.PS, P43.05) Anadarko Petroleum Corp. (APC.N, $65.86) BG Group plc (BG.L, 990.4p) Bayan Resources (BYAN.JK, Rp8,200) Beijing Enterprises Holdings (0392.HK, HK$48.5) Beijing Jingneng Power Co Ltd (600578.SS, Rmb5.64) CGN Power Co., Ltd. (1816.HK, HK$3.43) CLP Holdings Limited (0002.HK, HK$64.75) Cheung Kong Infrastructure (1038.HK, HK$69.7) China Datang Renewables Power (1798.HK, HK$1.03) China Gas Holdings Ltd (0384.HK, HK$11.06) China Resources Gas (1193.HK, HK$20.95) China Resources Power Holdings (0836.HK, HK$18.26) China Suntien Green Energy Corporation (0956.HK, HK$1.39) China Yangtze Power Co Ltd (600900.SS, Rmb14.73) Coal India (COAL.NS, Rs342.2) Datang International Power Generation Co. Ltd. (601991.SS, Rmb5.71) Datang International Power Generation Co. Ltd. (0991.HK, HK$3.15) ENN Energy Holdings Ltd (2688.HK, HK$41.05) Electricity Generating (EGCO.BK, Bt155.0) Energy Absolute (EAm.BK, Bt21.4) Energy Development Corporation (EDC.PS, P6.05) ExxonMobil Corporation (XOM.N, $73.39) First Gen Corporation (FGEN.PS, P23.5) Gayatri Projects (GAPR.NS, Rs494.6) Glow Energy PCL (GLOW.BK, Bt87.0) Guangdong Investment Limited (0270.HK, HK$10.94) Hess Corporation (HES.N, $52.3) Hong Kong Electric Investments (2638.HK, HK$5.55) Hong Kong and China Gas (0003.HK, HK$14.94) Huadian Fuxin Energy Corporation Limited (0816.HK, HK$2.85) Huadian Power International (600027.SS, Rmb7.26) Huadian Power International (1071.HK, HK$6.61) Huaneng Power International Inc (600011.SS, Rmb9.09) Huaneng Power International Inc (0902.HK, HK$8.89) Huaneng Renewables Corporation (0958.HK, HK$2.75) Hyflux Ltd (HYFL.SI, S$0.71) Hyundai Heavy Industries (009540.KS, W100,500) Inner Mongolia MengDian HuaNeng Thermal (600863.SS, Rmb4.58) JSW Energy (JSWE.BO, Rs86.5) Japan Drilling (1606.T, ¥2,676) KBR Inc. (KBR.N, $16.9) Keppel Corporation (KPLM.SI, S$7.15) Keppel Infrastructure Trust (KEPL.SI, S$0.52) Korea Electric Power (015760.KS, W47,400) Kunlun Energy (0135.HK, HK$5.74) Longyuan Power (0916.HK, HK$8.7) MODEC, INC. (6269.T, ¥1,504) Malakoff Bhd (MALA.KL, RM1.58) Malaysia Marine and Heavy Engineering Holdings Bhd (MHEB.KL, RM1.15) Manila Electric (Meralco) (MER.PS, P295.6) Manila Water Company (MWC.PS, P23.3) Marco Polo (MAPM.SI, S$0.205) NCCL (NCCL.NS, Rs68.05) NTPC Ltd (NTPC.BO, Rs126.6) Nippon Steel & Sumitomo Metal (5401.T, ¥237) PTT Exploration & Production (PTTEP.BK, Bt74.0) Perisai Petroleu (PPTB.KL, RM0.34) Perusahaan Gas Negara (PGAS.JK, Rp2,850) Petrobras (PBR.N, $4.34) Power Assets Holdings Limited (0006.HK, HK$74.0) Powergrid Corporation (PGRD.BO, Rs136.65) SDIC Power Holdings (600886.SS, Rmb12.04) SPCG (SPCG.BK, Bt24.6) Saipem (SPMI.MI, €8.08) Samsung Heavy Industries (010140.KS, W12,900) SapuraKencana Petroleum Bhd (SKPE.KL, RM1.99) Seadrill (SDRL.OL, Nkr55.9) Sembcorp Industries Limited (SCIL.SI, S$3.57, OUTPERFORM, TP S$4.2) Sembcorp Marine Ltd. (SCMN.SI, S$2.4) Shenzhen Gas Corporation Ltd. (601139.SS, Rmb8.42) Sichuan Chuantou Energy (600674.SS, Rmb10.89) Teekay Corporation (TK.N, $34.09) Tenaga (TENA.KL, RM12.18) Transocean Inc. (RIG.N, $14.34) VA Tech Wabag (VATE.BO, Rs686.85) Wood Group (WG.L, 600.5p) WorleyParsons (WOR.AX, A$6.26) YTL Corp (YTLS.KL, RM1.59) YTL Power (YTLP.KL, RM1.59)
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Disclosure Appendix Important Global Disclosures I, Gerald Wong, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. 3-Year Price and Rating History for Sembcorp Industries Limited (SCIL.SI) SCIL.SI Date 12-Nov-12 26-Feb-13 10-Apr-13 06-Aug-13 11-Nov-13 26-Feb-14 30-Oct-14 04-Nov-14 17-Feb-15 07-May-15 13-May-15 14-May-15 04-Aug-15
Closing Price (S$) 5.04 5.17 5.01 5.06 5.30 5.42 4.80 4.85 4.20 4.49 4.19 4.19 3.46
Target Price (S$) 6.08 5.88 5.08 5.18 5.28 5.40 5.30 4.70 4.50 4.20 4.20 3.80
Rating O N
R N
O U T PERFO RM N EU T RA L REST RICT ED
* Asterisk signifies initiation or assumption of coverage.
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals th e less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as we ll as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non -Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12 -month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
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Credit Suisse's distribution of stock ratings (and banking clients) is: Global Ratings Distribution
Rating
Versus universe (%)
Of which banking clients (%)
Outperform/Buy* 56% (30% banking clients) Neutral/Hold* 29% (38% banking clients) Underperform/Sell* 13% (31% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, a nd Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-andanalytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. Price Target: (12 months) for Sembcorp Industries Limited (SCIL.SI) Method: Our S$4.20 target price for Sembcorp Industries is based on: (1) sum-of-the-parts analysis with SembCorp Marine (SCMN.SI) valued at its Credit Suisse target price, (2) Gallant Venture marked to market and (3) the balance of SCI is valued at 9x FY16E earnings. Risk:
The key risks to our target price of S$4.20 for SembCorp Industries (SCI) include: (1) a potential slowdown in rig demand for SMM which constitutes a significant portion of our value of SCI, (2) asset impairment by SCI, (3) execution challenges leading to lower-than-expected contribution from India power assets.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names
The subject company (SCIL.SI, 601139.SS, 0135.HK, 1071.HK, 601991.SS, 0836.HK, 0392.HK, 1798.HK, 0991.HK, 0958.HK, 0816.HK, 0902.HK, 600863.SS, 0916.HK, 1816.HK, 0003.HK, 1038.HK, 0002.HK, 0006.HK, JSWE.BO, YTLS.KL, 015760.KS, MALA.KL, TENA.KL, PGAS.JK, MWC.PS, FGEN.PS, HYFL.SI, KEPL.SI, GLOW.BK, SPCG.BK, EGCO.BK, SCMN.SI, TK.N, BG.L, KPLM.SI, XOM.N, RIG.N, HES.N, 010140.KS, APC.N, SKPE.KL, 009540.KS, KBR.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (SCIL.SI, 601139.SS, 0135.HK, 0392.HK, 0958.HK, 600863.SS, 1816.HK, JSWE.BO, MALA.KL, TENA.KL, PGAS.JK, MWC.PS, HYFL.SI, KEPL.SI, SCMN.SI, TK.N, BG.L, KPLM.SI, XOM.N, 010140.KS, APC.N, SKPE.KL) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (XOM.N) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (SCIL.SI, 0135.HK, 0958.HK, 600863.SS, 1816.HK, JSWE.BO, TENA.KL, KEPL.SI, SCMN.SI, BG.L, XOM.N, APC.N) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (SCIL.SI, 601139.SS, 0135.HK, 0392.HK, 0958.HK, 600863.SS, 1816.HK, JSWE.BO, MALA.KL, TENA.KL, PGAS.JK, MWC.PS, HYFL.SI, KEPL.SI, SCMN.SI, TK.N, BG.L, KPLM.SI, XOM.N, 010140.KS, APC.N, SKPE.KL) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (SCIL.SI, 601139.SS, 2688.HK, 0135.HK, 600027.SS, 1071.HK, 0836.HK, 600900.SS, 0392.HK, 1798.HK, 0991.HK, 0958.HK, 0816.HK, 0902.HK, 600863.SS, 0916.HK, 1816.HK, 0003.HK, 1038.HK, 0002.HK, 0006.HK, JSWE.BO, YTLS.KL, 015760.KS, MALA.KL, TENA.KL, PGAS.JK, MWC.PS, FGEN.PS, AP.PS, HYFL.SI, KEPL.SI, GLOW.BK, SPCG.BK, EGCO.BK, SCMN.SI, TK.N, 5401.T, 6269.T, BG.L, KPLM.SI, XOM.N, HES.N, 010140.KS, APC.N, MHEB.KL, SKPE.KL, 009540.KS, KBR.N) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (XOM.N) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (PGRD.BO, XOM.N, RIG.N, HES.N, APC.N, KBR.N). Credit Suisse may have interest in (YTLS.KL, YTLP.KL, MALA.KL, TENA.KL, MHEB.KL, SKPE.KL)
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Please visit https://credit-suisse.com/in/researchdisclosure for additional disclosures mandated vide Securities And Exchange Board of India (Research Analysts) Regulations, 2014 Credit Suisse may have interest in (GAPR.NS, NCCL.NS, COAL.NS, VATE.BO, JSWE.BO, NTPC.BO, PGRD.BO) As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (0902.HK, 0916.HK, 1816.HK, BG.L, RIG.N, HES.N). Credit Suisse has a material conflict of interest with the subject company (2638.HK) . Credit Suisse acted as a joint financial advisor to Qatar Holdings, LLC. for its purchase of stake in HK Electric Investments from Power Assets Holdings. Credit Suisse has a material conflict of interest with the subject company (MER.PS) . Credit Suisse is acting as a financial advisor to San Miguel Corporation regarding the proposed sale of its 27% stake in Manila Electric Company (Meralco) to JG Summit Holdings. Credit Suisse has a material conflict of interest with the subject company (KPLM.SI) . Credit Suisse has a material conflict of interest with the subject company (KPLM.SI) . Credit Suisse is acting as a joint financial adviser for Keppel Corporation in relation to the voluntary unconditional cash offer for Keppel Land (the "Offer"). The information set out in this report is based on publicly available sources and does not arise from Credit Suisse's role as joint financial adviser to Keppel Corporation in relation to the Offer. Credit Suisse has a material conflict of interest with the subject company (RIG.N) . Credit Suisse AG is acting as an agent in relation to the company's announced share buy-back program for capital reduction purposes. For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.creditsuisse.com/disclosures or call +1 (877) 291-2683.
Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.creditsuisse.com/sites/disclaimers-ib/en/canada-research-policy.html. The following disclosed European company/ies have estimates that comply with IFRS: (BG.L, XOM.N). Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (SCIL.SI, 600011.SS, 0270.HK, 0135.HK, 0958.HK, 0902.HK, 600863.SS, 1816.HK, JSWE.BO, TENA.KL, HYFL.SI, KEPL.SI, GLOW.BK, SCMN.SI, TK.N, BG.L, KPLM.SI, XOM.N, PTTEP.BK, RIG.N, HES.N, APC.N, 009540.KS) within the past 3 years. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. For Thai listed companies mentioned in this report, the independent 2014 Corporate Governance Report survey results published by the Thai Institute of Directors Association are being disclosed pursuant to the policy of the Office of the Securities and Exchange Commission: Glow Energy PCL (Good) , SPCG (Good) , Energy Absolute (Good) , Electricity Generating (Excellent) , PTT Exploration & Production (Excellent) To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse AG, Singapore Branch .......................................................................................................... Gerald Wong, CFA ; Shih Haur Hwang
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The adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes the baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur. Additional information about the Credit Suisse HOLT methodology is available on request. The Credit Suisse HOLT methodology does not assign a price target to a security. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variable may also be adjusted to produce alternative warranted prices, any of which could occur. CFROI®, HOLT, HOLTfolio, ValueSearch, AggreGator, Signal Flag and “Powered by HOLT” are trademarks or service marks or registered trademarks or registered service marks of Credit Suisse or its affiliates in the United States and other countries. HOLT is a corporate performance and valuation advisory service of Credit Suisse. For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.creditsuisse.com/disclosures or call +1 (877) 291-2683.
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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.
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Sembcorp Industries Limited (SCIL.SI / SCI SP)
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