Singapore | Energy Equipment and Services

Asia Pacific Equity Research

SEMBCORP INDUSTRIES | BUY MARKET CAP: USD 4.5B

5 Aug 2015 Company Update

AVG DAILY TURNOVER: USD 10M

BETTER QOQ AND YOY PERFORMANCE Good 2Q15 results Concerns well-flagged Interim dividend of S$0.05/share

• • •

BUY (maintain) Fair value

S$4.31

add: 12m dividend forecast

S$0.15

versus: Current price

S$3.46

12m total return forecast

2Q15 results within expectations Sembcorp Industries (SCI) reported a 5.8% YoY drop in revenue to S$2.4b but a 24.9% increase in net profit to S$223.6m in 2Q15, such that 1H15 net profit accounted for 50% of our full year estimate. Stripping out one-off items such as disposal gains (S$54.7m gain on disposal of Sembcorp Bournemouth Water Investment) and fair value losses on financial instruments, we estimate core PATMI to be around S$191m, still within expectations. Better sequential performance in Singapore utilities As mentioned in our earlier report, SCI’s Singapore utilities business is more than the power business; the natural gas, water and solid waste treatment and management segments are also important contributors. Indeed, in 2Q15, the utilities segment was boosted by better performance in the solid waste division with favourable contract renewals, bringing net profit for Singapore utilities to S$36.4m in the quarter, compared to S$30.9m in 1Q15. Overseas utilities and urban devt also better As for overseas utilities, net profit was also higher at S$60.6m vs $50.1m in 1Q15. The first unit of the TPCIL power plant in India commenced operation in 1Q15, and the plant will be in full operation by 3Q15. In the urban development segment, net profit increased to S$11.9m in 2Q15 due to higher contribution from the Nanjing and Chengdu projects in China.

29%

Analysts Low Pei Han, CFA (Lead) ● +65 6531 9813 [email protected] Carey Wong ● +65 6531 9808 [email protected] Key information Market cap. (m)

S$6,173 / USD4,467

Avg daily turnover (m)

S$13 / USD10

Avg daily vol. (m)

3.0

52-wk range (S$)

3.35 - 5.46

Free float (%)

50.1

Shares o/s. (m)

1,784.2

Exchange

SGX

BBRG ticker

SCI SP

Reuters ticker

SCIL.SI

SGX code

U96

GICS Sector

Industrials Industrial Conglomerates

GICS Industry Top shareholder

Temasek 49.49%

Relative total return

1m

3m

Company (%)

-12

-22

-34

-8

-15

-34

STI-adjusted (%) Price performance chart Share Price (S$)

Negatives priced in; look beyond current volatility Looking ahead, intense competition in the power market is likely to persist, and low oil prices also mean that the marine division may continue to be a drag. However, we believe that these concerns have already been priced in. Meanwhile, an interim dividend of S$0.05/share has been declared, same as last year. Updating our sum-of-parts valuation with a lower fair value estimate of Sembcorp Marine, our fair value for SCI drops from S$4.40 to S$4.31. Maintain BUY. Key financial highlights Year Ended Dec 31 (S$m)

3700

5.17

3280

4.54

2860

3.91

2.64 Aug-14

10,894.7

9,850.0

9,708.4

Gross profit

1,287.3

1,414.7

1,221.4

1,203.8

Core EBITDA

1,251.5

1,377.0

1,416.1

1,445.4

Mkt Cap

820.4

801.1

726.8

722.5

Beta

45.7

44.3

40.7

40.5

na

na

40.5

41.2

11.9

11.9

12.4

12.4

7.6

7.4

7.4

7.4

15.7

14.3

12.0

11.1

1.3

1.2

1.1

1.0

Net profit margin (%) ROE (%) Price/NTA (x)

Feb-15

May-15

SCI SP

1600 Aug-15

FSSTI

Industry-relative metrics 10,797.6

Gross profit margin (%)

Nov-14

Sources: Bloomberg, OIR estimates

FY16F

Cons. EPS (S cents)

2020

Fair Value

FY15F

EPS (cents)

2440

`

3.27

FY14

Profit attributable to shareholders

Index Level

5.81

FY13

Revenue

12m

Percentile 0th

25th

50th

75th

100th

ROE PE PB

Industry Average

Company

Note: Industry universe defined as companies under identical GICS classification listed on the same exchange. Sources: Bloomberg, OIR estimates

Please refer to important disclosures at the back of this document.

MCI (P) 005/06/2015

OCBC Investment Research Singapore Equities

Exhibit 1: Quarterly financial highlights 2Q14 Yr end Dec

2Q15

% Chg

1Q15

% Chg (QoQ)

(S$m)

(S$m)

(YoY)

(S$m)

2,533.8

2,387.9

-5.8%

2,338.1

2.1%

-2,199.8

-2,034.9

-7.5%

-2,049.5

-0.7%

Gross Profit

334.0

353.0

5.7%

288.5

22.3%

General and administrative expenses Operating profit

-87.1 246.9

-90.6 262.4

4.1% 6.3%

-84.6 204.0

7.1% 28.7%

Revenue Cost of sales

Other income

16.2

70.8

337.6%

19.7

259.0%

Non-operating expenses (net)

-9.2

-27.4

197.2%

-10.0

173.0%

-12.3

-50.1

306.6%

-25.5

96.2%

44.2

58.5

32.6%

40.0

46.3%

Profit before tax

285.7

314.3

10.0%

228.1

37.8%

Tax expense

-41.1

-41.1

0.0%

-40.5

1.7%

Net profit

244.6

273.2

11.7%

187.7

45.6%

PATMI

179.0

223.6

24.9%

142.2

57.2%

Net finance cost Share of results of assoc and JVs

Gross Profit Margin

13.2%

14.8%

12.3%

Operating Margin

9.7%

11.0%

8.7%

Net Profit Margin

7.1%

9.4%

6.1%

Sources: Company financials

Exhibit 2: Sum-of-the-parts valuation Method

Share price

Value

Stake

S$

S$m

(%)

Effective stake S$m

Value/share S$

2.62

5,470

60.6

3,315

1.86

Listed entities Sembcorp Marine

OIR fair value

Gallant Venture

Market value

0.225

1,086

11.96

130

0.07

Sembcorp Salalah

Market value

2.4 OMR

802

40.0

321

0.18 2.11

Non-listed entities Utilities

10x FY15/16 EPS

Integrated urban devt (excl. Gallant Venture)

3,788

2.12

Book value

637

0.36

Others

Book value

-97

-0.05 2.43

Add: Net cash (debt) ex-Marine

-350 5% 4.31

Conglomerate discount

Source: OIR estimates

2

OCBC Investment Research Singapore Equities

Company financial highlights

Income statement Year Ended Dec 31 (S$m)

FY13

FY14

FY15F

FY16F

10,797.6 1,287.3 1,251.5 948.2 155.0 1,214.4 -117.2 1,097.2 276.8 820.4

10,894.7 1,414.7 1,377.0 1,062.2 158.3 1,246.4 -162.2 1,084.3 283.2 801.1

9,850.0 1,221.4 1,416.1 906.2 163.0 1,095.0 -125.9 969.1 242.3 726.8

9,708.4 1,203.8 1,445.4 893.2 167.9 1,088.5 -125.2 963.3 240.8 722.5

FY13

FY14

FY15F

FY16F

2,255.9 3,433.6 5,126.7 13,753.9 1,899.0 4,487.8 7,223.9 5,230.4 6,530.0 13,753.9

1,661.4 4,469.0 7,725.4 17,176.4 4,734.6 4,271.4 9,944.1 5,616.1 7,232.3 17,176.4

1,837.5 3,659.0 8,367.0 17,381.8 4,734.6 4,067.4 9,690.7 6,073.3 7,691.0 17,381.8

1,632.3 3,607.3 8,823.8 17,800.3 4,734.6 4,030.8 9,654.2 6,528.2 8,146.1 17,800.3

FY13

FY14

FY15F

FY16F

1,454.6 1,509.2 -1,188.8 -161.8 -1,350.5 15.3 173.9 2,059.8 22.1 2,255.9

1,475.9 -57.4 -1,306.4 -135.0 -1,441.4 900.6 -598.2 2,255.9 3.8 1,661.4

1,521.1 2,002.1 -1,000.0 -80.7 -1,080.7 -745.3 176.1 1,661.4 0.0 1,837.5

1,550.4 1,441.4 -1,000.0 -101.5 -1,101.5 -545.1 -205.3 1,837.5 0.0 1,632.2

Key rates & ratios

FY13

FY14

FY15F

FY16F

EPS (cents) NTA per share (S$) Gross profit margin (%) Net profit margin (%) PER (x) Price/NTA (x) EV/EBITDA (x) Dividend yield (%) ROE (%) Net gearing (%)

45.7 2.8 11.9 7.6 7.6 1.3 5.6 4.9 15.7 -5.5

44.3 2.9 11.9 7.4 7.8 1.2 5.1 4.6 14.3 42.5

40.7 3.2 12.4 7.4 8.5 1.1 5.0 4.3 12.0 37.7

40.5 3.5 12.4 7.4 8.5 1.0 4.9 4.3 11.1 38.1

Revenue Gross profit Core EBITDA Operating profit Associates and JVs Pre-tax profit Tax Profit after tax Minority interests Profit attributable to shareholders

Balance sheet As at Dec 31 (S$m) Cash and cash equivalents Other current assets Property, plant, and equipment Total assets Debt Current liabilities excluding debt Total liabilities Shareholders equity Total equity Total equity and liabilities

Cash flow statement Year Ended Dec 31 (S$m) Op profit before wc. changes Net cash from operations Purchase of PP&E Other investing flows Investing cash flow Financing cash flow Net cash flow Cash at beginning of year Forex effects Cash at end of year

Sources: Company, OIR forecasts

Company financial highlights

OCBC Investment Research Singapore Equities

SHAREHOLDING DECLARATION: The analyst/analysts who wrote this report holds/hold NIL shares in the above security.

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Published by OCBC Investment Research Pte Ltd

Important disclosures