Sembcorp Industries Ltd

SGX:U96

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Sembcorp First Quarter 2018 Results Announcement. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, the 3rd of May 2018.

I would now like to hand the conference over to your first speaker today, Ms. Ng Lay San, the Senior Vice President of Group Strategic Communications and Sustainability at Sembcorp Industries Ltd. Thank you. Please go ahead.

[Lay Ng, executive]

Good morning, everyone. Thank you once again for calling into Sembcorp Industries' First Quarter 2018 Results Briefing. I'm Lay San, and I'm here with the Group President and CEO of Sembcorp Industries, Neil McGregor; and Group CFO, Koh Chiap Khiong. To enable you to follow the briefing, it would be helpful for you to have our announcement kit on hand. This includes a copy of our MASNET financial statement, a PowerPoint presentation of the results as well as our press release. This call is being webcast and you can also follow the results briefing online. The webcast can be accessed through our website homepage, www.sembcorp.com.

Without further delay, I will now hand over to Neil and Chiap Khiong to take us through the results.

[Neil McGregor, executive]

Good morning, everyone, and thank you, Lay San. I'll now move to Slide 4, first quarter 2018 performance roundup. Let me start by bringing you through our first Q result highlights.

Group turnover improved 30% to $2.8 billion from $2.1 billion in first Q 2017. However, profit from operations was $213.1 million compared to $268.6 million in first Q 2017.

Group net profit was $76.6 million compared to $116.3 million in first Q 2017. This was mainly due to a lower profit contribution from the Marine and Urban Development businesses. The Utilities business performed well this quarter. Earnings per share for the period was $0.036 and annualized return on equity was 4.3%.

I shall now take you through the key developments in each of our business segments, starting with our Utilities business. This is Slide 5. In first Q 2018, the Utilities business net profit grew 27% to $70.3 million from $55.3 million in first Q 2017. With Singapore and China being the biggest profit contributors. As part of our focus on active capital recycling, we initiated the process for an initial public offering, an IPO, of Sembcorp Energy India and filed a draft red herring prospectus with the Securities and Exchange Board of India. Additionally, we entered into a conditional sales and purchase agreement to divest our municipal water operations in South Africa.

Earlier this year, we were Singapore's first energy company to establish a climate change strategy. A key thrust of our climate change strategy is our target to double our renewables capacity to approximately 4,000 megawatts in 5 years to create one of the region's leading independent renewable energy players. I'm pleased that we have made some progress in this regard.

In the first quarter of this year, another 300 megawatts of new wind power capacity was secured. The 300 megawatts was the third bid that we won in India's national wind auctions.

In total, we have secured 800 megawatts in the 3 wind power auctions in India, making us the largest cumulative winner to date and bringing our global renewables capacity to over 2,400 megawatts.

In Singapore, we continue to deepen our presence. The Energy Market Authority soft launched the Open Electricity Market last month in Jurong, where we had made good progress to grow our retail power business and our energy from waste facility on Jurong Island, which produces steam for our industrial customers, also commenced operations in April 2018.

Now on to Slide 6, Marine. You've heard the details from Sembcorp's Marine results from Weng Sun and the team. In first Q 2018, Sembcorp Marine contributed a net profit of $1.8 million to the group compared to a net profit of $22.6 million in first Q 2017. The weak performance is largely due to the lower contributions from offshore platform projects and the absence of one-off gains from the disposal of Cosco. Excluding the effects of the adoption of SFRS 15, our share of net profit would've registered a net loss of $21.6 million for first Q 2018.

In March, the business secured an order from TechnipFMC for the EPC of the hull and living quarters for a newbuild FPSO. With this, the total net order book for Marine stood at $7.7 billion.

The quarter also saw some development in the letters of intent with Shell and SeaOne Caribbean. Shell has announced its decision to proceed with its deepwater Vito development in the U.S. Gulf of Mexico. While for the LOI with SeaOne, further preliminary works have been undertaken. The business continues to remain focused on actively managing its balance sheet and maintaining a financial -- a healthy financial position. The successful monetizing of its rig inventory will also contribute to improving the business liquidity over time.

Now Slide 7, Urban Development. The Urban Development business recorded a net profit of $9.6 million compared to $37.2 million in first Q 2017. Earnings to this business can be uneven, depending on the timing of land sales. First Q 2017 performance was strong as significant profit was recognized from the sale of a large plot of land in Nanjing. Order book continues to be healthy at 296 hectares with keen interest for industrial land in Vietnam and commercial and residential land in China.

Now let me hand over to our Group CFO, Chiap Khiong, to take you through the group financial review. Chiap Khiong, thank you.

[Chiap Khiong Koh, executive]

Thank you, Neil. Good morning, everyone.

I'm on Slide 9. Sembcorp Industries fostered a turnover, $2.8 billion, for the first quarter of 2018, a 30% increase over 1Q 2017. The group achieved an EBITDA of $286 million in 1Q '18.

Group profit from operation was $213 million in 1Q '18, a decrease of 21% over 1Q '17 due to lower contribution from Marine and Urban Development.

Lower finance costs in 1Q '18 were mainly due to Marine's repayment of bank borrowings and the refinancing of Utilities' second thermal plant in 2017. In 1Q '17, interest cost before commercial operation in February 2017 of Utilities in the second thermal plant was also capitalized. Higher finance income in 1Q '18 was mainly due to the higher bank balances and Marine's interest that come from a customer with a deferred payment term. The effective tax rate was higher mainly because of the tax benefit from losses of a subsidiary in India, which was not recognized. In addition, Marine's deferred tax assets are recognized only to the extent that's probable that the related tax benefit will be realized. Net profit achieved for 1Q '18 was $77 million. The decline in net profit was mainly due to lower Marine and Urban Development earnings. Earnings per share amounted to $0.036 for 1Q '18.

Slide 10. The group has adopted the Singapore Financial Reporting Standards (International) framework, new accounting standards that are effective on January 1, 2018. The restatement of 2017 income statement is attributed mainly to the Marine business due to the application of SFRS(I) 15, revenue from contracted customers. The adoption of this SFRS leads to differences in timing of revenue and related cost of sales recognition for certain contracts. There was a reversal of revenue and [ indiscernible ] cost of sales for certain contracts pre-2018 now to be recognized upon the transfer of legal title to customers.

In full year 2017, when some of these contracts were terminated and new contracts entered into revenue and cost of sales were recognized. We have provided the 1Q '17, as previously reported in the slide, for your easy reference. For full year 2017 restatement, you may refer to Slides 30 to 32 in the appendix.

Slide 11. Utilities delivered higher turnover mainly from Singapore, China and India. Marine's higher turnover was the result of higher revenue recognition for rigs and floaters upon the delivery of 3 jack-ups following the adoption of SFRS. Excluding the new -- the effects of the adoption of this SFRS, Marine's revenue would have seen an increase of 15% compared with 1Q 2017.

The group net -- group PFOs registered $213 million profit from -- in 1Q '18, a decrease of 21% against last year. Utilities PFO was 9% higher compared to last year. Marine's PFO was main -- lower, mainly because overall business volume, especially in rigs, floaters and offshore platforms which impacted the adoption of overhead costs -- which impacted the absorption of the overhead costs. Urban Development lower PFO was lower mainly because of the lower land sales in 1Q '18, as compared to '17. We saw significant a land sale from Nanjing in China last year.

Net profit. In 1Q '18, the Utilities business contributed $70.3 million in net profit on top of the details in the next slide.

Marine's net profit decreased mainly due to the absence of one-off gain on disposal of Cosco Shipyard Group in 1Q '17. Lower contribution from the offshore platform offset by higher profit recognition with the 1Q '18 on adoption of SFRS 15. As announced by Marine, excluding the effects on adoption of this SFRS, net loss for 1Q 2018 would have been $33 million. Group share would be $21.6 million.

The Urban Development net profit was mainly from industrial land sales from Vietnam. This amount was lower than last year as we recognized a 42.6 hectare land sale in Nanjing last year.

Utilities net profit was $70.3 million compared to $55.3 million in last year. Singapore and China were the largest contributors to Utilities net profit. Singapore's net profit of $35.2 million in 1Q is comparable to 1Q '17. China net profit of $32.7 million was an increase of 48% compared to 1Q '17. This was mainly due to our Songzao plant which had higher service hours during the winter season. India 1Q '18 net profit is comparable to 1Q '17. India saw improved net profit contribution from TPCIL, which delivered a net profit of $14.6 million. SGPL registered a loss of $24.5 million. SGI had a net loss of $6.5 million due to the low wind seasons in 1Q '18 and lower wind speed. Rest of Asia, lower contribution mainly due to Myingyan lower percentage of completion, resulting in lower [indiscernible] of construction profit. Middle East and Africa, operations delivered a higher net profit. 1Q '17 had a different tax charge due to a change in Oman tax rate. U.K. and America, U.K. performed better, was mainly due to the higher steam demand seen on the site. Corporate, 1Q '18 corporate cost included a capital gain tax charge on SGIL's transfer, part of the reorganization announced in February 2018. Note that 1Q '17 exceptional items, SGPL refinancing cost of $5.2 million was recorded last year as well.

Slide 15, our Energy segment continued to be the largest net profit contributor, contributing 46% of the Utilities net profit. The Water and On-site Logistics and Solid Waste Management contributed 33% and 21%, respectively.

Group CapEx was $168.2 million, and equity investment was $292.8 million. Utilities CapEx was mainly from the renewable business. Utilities equity investment in Sembcorp Energy India Limited shares was for payment upon transfer of legal title of the remaining Sembcorp Green Infra Limited shares.

Cash flow from operating activities before changes in working capital was $302 million in 1Q '18. The cash outflow from changes in working capital is mainly attributed to Marine's working capital for ongoing projects, offset by receipts of ongoing and completed projects. Net cash used in investing activities 1Q '18 was $1 million. The dividend and interest income received have funded the acquisition of property, plant and equipment for the quarter. Group's net debt is approximately $100 million higher than 31 December 2017. Earnings per share amounted to $0.146 annualized and return on equity for the group was 4.3%. Interest cover was 2.5x in 1Q '18. NAV has increased to $3.90 per share.

I'm on Slide 20, on the outlook statement. Utilities, the global energy transition continues as the industry adjusts to the impact of changing global fuel mix, increasing demand for renewables, the proliferation of distributed energy resources and declining power prices. The share of electricity as a proportion of total energy demand is also increasing, in part due to the electrification of the heating and transport sectors.

To benefit from the global energy transition, the Utilities business will focus long-term growth along its 3 business lines: Gas & Power, Renewables & Environment, Merchant & Retail.

The Utilities business is expected to deliver a better performance in 2018, underpinned by an expected turnaround to profitability for its India energy operations.

Marine. Global exploration and production, E&P, spending trend continues to improve due to firmer oil prices in the first quarter of 2018. However, the overall industry outlook remains challenging. Despite improvement in E&P CapEx spending outlook, it will take some time for this to translate into new orders. Margins remain compressed with intensifying competition. Based on the existing orders, overall business volume and activity is expected to remain low, and the trend of negative operating profit may continue. Sembcorp Marine continues to manage its cost to align with business volume and its cash flow.

Urban Development. The Urban Development business has a healthy order book. It expects income contribution from the sale of its property developments in China and Vietnam. The business is expected to continue to perform well in 2018.

For the group, the market environment is expected to remain challenging in 2018. A broader-based global recovery is underway, aided by a rebound in investment and trade. As the group repositions its businesses for the future, it is confident that it is well placed to benefit from the market's recovery. Thank you.

[Lay Ng, executive]

Thank you. The panel will now be happy to take any questions you may have.

[Operator]

[Operator Instructions] Your first question comes from the line of Cheryl Lee from UBS.

[Cheryl Lee, analyst]

I have 3 questions -- or I have a few questions but to the 3 first. For India, may we have the split of net profit between TPCIL, SGPL and SGI? I think the -- are there any lumpy items in the China Utilities number? And thirdly, when I look at the Singapore performance, it does seem to be a bit lower on the recurring level, even from a few quarters ago. And could we just talk about the underlying business conditions that we are seeing over there?

[Chiap Khiong Koh, executive]

Cheryl, I will take your question on reverse order. I think if you look at Singapore, the run rate in the past few quarters, 1Q and 4Q, is about $24 million, $26 million. This quarter, it's achieving about [ $25 million ], so it's comparable, we believe. Of course, the segments in the -- the power segments remain very competitive. Now we are seeing a little bit of margin compression, but the power -- besides the power, the centralized utilities and other businesses are doing well, so I think it's offsetting some of this power compression. So on the quarterly rate itself, it's about the same as what we are seeing in the last few quarters.

[Neil McGregor, executive]

Doing well in a difficult market.

[Chiap Khiong Koh, executive]

Yes. China, I mentioned earlier that it's -- the improvement mainly due to our Anwen plant. This is the coal-fired plant next to the mine mouth. In the winter itself, it was running a very high plant load factor, namely because hydro was not running and this plant being the most cost effective was actually running quite hard during this period of time. And that is driving the better performance in China. It's a bit seasonal, so I think depending on the season. So I think in the 1Q, it did pretty well. India, if I understand, you want the breakdown. So TPCIL or SEIL right now, we recorded [ $15 million ]. SGPL, a loss of $25 million. SGI, which is the Green Infra, a loss of $7 million as a result of a low wind season during 1Q.

[Cheryl Lee, analyst]

Okay. And then just the 2 follow-ups. Were there any -- do we -- should we expect any start-up losses from the EfW plant in Singapore? Or has it been sort of like profitable from the start? And also in China, what was the contribution of the Changzhi water?

[Chiap Khiong Koh, executive]

Okay. Changzhi water, we don't give the breakdown, so I would say it would not be too material for China. In terms of the EfW, yes, we just commissioned COD in second Q. So we are running commissioning during 1Q and we're seeing the plant running up quite nicely. So I think this plant is [ hinderance ] on quite a bit on the oil price. So I think the oil price recovery has also been quite positive. So it's contributing to the business at this point in time.

[Operator]

Your next question comes from the line of Lim Siew Khee from CIMB.

[Lim Siew Khee, analyst]

I've got 3 questions. SGPL losses of $25 million, was there any shutdown in first Q? I thought we are expecting it to actually perform better.

[Neil McGregor, executive]

Yes, there was a shutdown. That's quite typical in the first couple of years of operation.

[Lim Siew Khee, analyst]

So relative to 4Q, maintenance shutdown period is the same? How many days?

[Lay Ng, executive]

14 days.

[Lim Siew Khee, analyst]

I thought it was 4Q.

[Lay Ng, executive]

4Q or 1Q? 4Q was 18 days. And then -- sorry, SGPL, is it -- oh, that is about same number of days. So 18 days.

[Chiap Khiong Koh, executive]

Siew Khee, maybe the other -- one was the 1Q shutdown. But I think the other thing I think you are looking at probably the tariff improvement. I think for SGPL, although it is running on a short-term basis, we did, I think, last year, locked in quite a few short-term contracts that will run until September. So some of the improvement in the market will see a bit of a lag coming into SGPL. Second thing I think we also need to highlight is coal prices was on -- at a higher side than in the last few quarters. We expect that trend to come down. So that also affected a little bit on the SGPL's performance as well. So I think the effect on, I think, the tariff improvement and where we are seeing the market going, there will be a bit of a lag as we contract out some of the old contracts that we have in the past.

[Lim Siew Khee, analyst]

So you're saying that the short-term contracts that you ran until September last year, that had lower tariffs?

[Chiap Khiong Koh, executive]

Yes. Whatever we signed last year, some of it will carry forward to up to September this year.

[Lim Siew Khee, analyst]

So that's good or bad?

[Chiap Khiong Koh, executive]

If it's a rising market, then also good. But of course, when we -- last year, when we talk about it, I think contracting to run the plant is important because as we start up the plant, we want to make sure that the plant is running up fully. So I think the good news is that we are contracted and we are running. The not so good news is part of it is locked up in a lower tariff, that we cannot enjoy the higher tariff.

[Neil McGregor, executive]

Yes. So higher volume, lower tariff, and then the future, you've already seen that the market is hardening and it's going to take some time for the contracts that were done last year to roll off and for the new higher-priced contracts to come in and take effect.

[Lim Siew Khee, analyst]

Is the IPO time line still on track?

[Chiap Khiong Koh, executive]

We haven't given the time line. I think we have been seeing -- meeting people, so I think, yes, we are still tracking along what we have in mind.

[Lim Siew Khee, analyst]

Okay. Also for -- sorry, actually went on more than 3. I have 2 more. One is, did you stop giving breakdown for Singapore in terms of energy and steam?

[Chiap Khiong Koh, executive]

Did we stop giving...

[Lay Ng, executive]

Yes, we stopped giving that.

[Lim Siew Khee, analyst]

For other business sides, their loss?

[Chiap Khiong Koh, executive]

Which page are you on?

[Lim Siew Khee, analyst]

13.

[Chiap Khiong Koh, executive]

13, okay? Let me just check. Okay, 13. Okay, this is -- you know that we still have a shipyard in -- that we are holding in China, the CSE. So CSE is also having the same issue that -- what we are facing. So this loss is mainly to that -- from that. I think maybe just an update on CSE. CSE proposed a joint venture in Penglai and that itself we sold it last year. We got the money and some cash flow is dividend outright to the group. So we managed to actually dispose one subsidiary in the Marine side under CSE. Now we are actually holding CSE and we are looking options then.

[Lim Siew Khee, analyst]

The Singapore top portion, there's also some contract from the design and construction. So can I say that there's some competition in purchase in Singapore, that's why it's not able to cover the losses in CSE?

[Chiap Khiong Koh, executive]

SDC, you're talking about SDC, okay. In the other segment, you have SDC, you have -- so the, I think, CSE impact is higher than [ we saw ] this year.

[Lim Siew Khee, analyst]

Okay. So is this recurring? Or this is a -- because I mean, they haven't really gotten orders, so the recurring losses will continue?

[Chiap Khiong Koh, executive]

I think -- yes, we would expect losses from this operation. So for this year, we still would expect the trend to continue.

[Operator]

Your next question comes from the line of Conrad Werner from Macquarie.

[Conrad Werner, analyst]

In the outlook statement, it talks about a turnaround expected in profits in the India utilities, which we haven't seen yet. So when can we see that? And does -- do you expect that business to be profitable for the year as a whole or just in sort of the latter quarters of this year? Will you just maybe be a bit more granular on that, please?

[Neil McGregor, executive]

Yes. We've said that the business will be profitable by year-end. That's what we stated. We still stick by that statement. What you'll see is that the gap is narrowing because as SGPL came on stream last year, we've added more volume onto the market initially at lower prices and now higher prices are moving through. So you would expect that the losses that have been made to start narrowing. That's about it. That's about as definitive as I can be.

[Conrad Werner, analyst]

Okay. And sorry, just to remind us on the seasonality on the SGI around the wind, what are the strongest quarters in the year for SGI?

[Neil McGregor, executive]

Quarter 2 and quarter 3.

[Conrad Werner, analyst]

Okay. So we will still be able to reach a profitable outcome, hopefully, by the end of the year, even with a low quarter for SGI in the seasonally low quarter in the fourth quarter?

[Neil McGregor, executive]

You know I'm not allowed to give leading statements, but I have stated that the SGIL would be profitable by the end of the year, which includes SGPL and SGI.

[Chiap Khiong Koh, executive]

SGI, if you look at it, Conrad, is the full year last year was profitable. And in 1Q last -- in 1Q last year, this was a loss and 4Q was also a loss. So I think it's seasonal effect.

[Neil McGregor, executive]

Yes.

[Conrad Werner, analyst]

Okay. And then can I just follow up on the higher tax rate that you were talking about in the prepared comments? There were 2 drivers, I think, and I didn't quite write them down in entirely. Chiap Khiong, can you maybe just -- there's something about a tax benefit that is not going to be recognized or something, sorry.

[Chiap Khiong Koh, executive]

Yes. No problem, I was talking about the higher effective tax rate, namely because in India, we have losses. So this tax losses was actually not recognized because in India, they don't have a group tax relief concept. So let's say for SGPL, if we don't -- we cannot utilize fully, this loss we would not recognize as a benefit. So one of the things that we are looking at is really about merging. And if it's merged, then maybe some of this benefit can be utilized. That's number one. Number two, Marine also have some losses and they have also not recognized as a deferred tax asset as well. So therefore, your effective tax rate on P&L wise is actually higher because we have not recognized this benefit in the balance sheet.

[Conrad Werner, analyst]

And the reason for not recognizing the Marine benefits, I think you mentioned was because there -- there is not today a reasonable expectation of them being able to be utilized, is that right?

[Chiap Khiong Koh, executive]

Yes. So I think from a comping point of view, it's a bit more conservative. You need to be able to see it and it's probable and all those things. So I think that currently, the group has actually adopted more on a conservative basis than -- previously than we recognize this asset into the books.

[Conrad Werner, analyst]

So I guess, this would tie with the outlook that the losses may continue in Sembcorp Marine, I guess? That's...

[Chiap Khiong Koh, executive]

So that's a little bit different. Singapore, you can actually use a group relief to offset. I think this tax loss is really small in the Brazil site.

[Operator]

[Operator Instructions]

[Lay Ng, executive]

Okay, I've got a question here. Lay San speaking on behalf of Pei Han Low. And the question is, it is mentioned in the outlook that the Utilities business is expected to deliver better performance, underpinned by an expected turnaround profitability for its India energy operation. But this is a repeat of the question a little bit. Does this refer to full year profitable operations for India in 2018 or just that India will see profitability in either 3Q or 4Q? I believe this answer was previous given.

[Neil McGregor, executive]

It was and was for the whole year.

[Lay Ng, executive]

Yes. So -- and it was for the whole year.

[Operator]

You have a follow-up question from Cheryl Lee from UBS.

[Cheryl Lee, analyst]

So my follow-up question is, if I look at Utilities, the rest of Asia has fallen. And is this due to accounting on the Myanmar power plant? And can we just get a statement, the start-up time for this?

[Chiap Khiong Koh, executive]

Cheryl, yes, it's relating to the IFRIC 12 treatment. So last year, the -- under the [ finance cost ], we recognized more construction income. As it tapers off to the end now, we're expecting COD to be in this month and in July, so -- and the first COD too will be in July. So that's the effect on the construction income that is being recognized by IFRIC 12, yes.

[Cheryl Lee, analyst]

Okay. And then -- and secondly on this regards to the potential IPO, I recall that there's an intention to repay some of the masala bonds issued by Sembcorp Industries. So just correspondingly, is the intention also to, if that happens, to pay down the debt on your side or would you still retain the level of indebtedness on the Sembcorp group level?

[Chiap Khiong Koh, executive]

So for that, I think, cash is fungible. So if we don't have use with the [ fee pay re-down ] because we are [ repaying ] cost. So we have flexibility. Once we get back the masala bond proceeds, we will correspondingly look at paying down if there's no use for it.

[Neil McGregor, executive]

Isn't the -- sorry, Cheryl, there's another answer to this, is that we consolidate 100% of India on our balance sheet. So any reduction on debt on the India side has also a reduction on debt on our total balance sheet. Can you confirm that, Chiap?

[Chiap Khiong Koh, executive]

We also borrowed to -- I think the point is that it's correct.

[Neil McGregor, executive]

The circular? Circular, okay.

[Chiap Khiong Koh, executive]

Yes, yes.

[Neil McGregor, executive]

Did you get that Cheryl?

[Cheryl Lee, analyst]

Yes, yes, I got it, yes. And then just one more on Urban Development. So if you look at land sales in China versus Vietnam, is it true that China is generally more profitable on the commercial and industrial side? So just trying to understand like is the sale China land versus Vietnam land, yes?

[Chiap Khiong Koh, executive]

So China land, the most -- the -- I think in terms of margin, the best is actually residential. So if you see Chengdu and Nanjing, the residential land sale contributed quite a bit to our bottom line. In terms of industrial, that will be the -- they're not as good as residential. Commercial is in between residential and industrial. So we usually have a mix between a few of this. So as compared to Vietnam, Vietnam is small industrial sales right now because the level of development is quite different. In China, it's more nearer to the main city, whereas, in Vietnam, it's more towards the industrialized area. So I think we need to build in the industrialization first before we see the residential and commercial coming in later on. So we're doing a little bit of that in the Ho Chi Minh-Binh Duong area. We saw some residential, but the margin is definitely not as good as what we are seeing in China at this point in time.

[Cheryl Lee, analyst]

So just to clarify, actually, your China sales is mostly sort of -- is actually mostly the residential portion and there's not much commercial and industrial portion for the China side. Is that...

[Chiap Khiong Koh, executive]

Mainly, the profit contribution comes from the residential, yes.

[Operator]

You're next question comes from the line of Mayuko Tani from Nikkei.

[Mayuko Tani]

I have a question about Marine business. With an oil price in -- on an increasing trend, is -- do you see that Marine business bottomed? Do you expect next quarter probably will be better or worse? And -- or do you still see a necessity of probably having a provision, or in the future, you have to sell some of the businesses? Did you say that you're looking for -- to sell CSE? Can you give me the outlook?

[Neil McGregor, executive]

Yes. Well, I can't tell you how long the bottom is going to last, but I can tell you that global exploration and production spending trends continue to improve. And you're seeing that in the dollars per barrel of oil, especially for the first quarter of 2018. But the overall outlook for the industry still remains challenging. That's despite improvement in the E&P CapEx spending outlook. And it will take some time to translate into new orders. The reason for that is, look, at some point, for production of oil, the oil industry will need to move back offshore. Currently, it is delivering most of the production or the new production is coming from shale in the U.S. And until that -- either demand goes up or depletions, well depletions come in, which lowers the yield in shale, we expect prices generally to be around current levels. But who knows what happens in the oil market ultimately. We certainly see the current prices at around $60 to $70 per barrel range is profitable for the oil companies and that the well head costs for both onshore and offshore are similar at around about $40 to $43 a barrel. Now if you take that into account, the industry, the oil industry is making positive margins. And over time, economically, one would expect an increase in exploration and production. But that will only happen once the supply and demand balance changes and I can't give you an indication of when that will be. We know that there will be a change in the cycle, I just can't tell you when.

[Mayuko Tani]

So the change of the cycle hasn't started, do you think?

[Neil McGregor, executive]

Well, oil prices have firmed. But in terms of the increasing demand for oil, no, that's still at below 1%.

[Mayuko Tani]

Okay. Did you say you're looking to sell CSE or...

[Chiap Khiong Koh, executive]

I think we are open to look at options, so we have not announced it yet. So it's an old -- there is a yard that we have been holding for a long time, so we are -- there are options that we are looking at.

[Mayuko Tani]

Okay. If I may continue, sorry, the IPO timing, you said you haven't announced it. But the -- can you announce, I mean, roughly, what's the timing that you're looking at?

[Neil McGregor, executive]

No. Because under the Securities and Exchange Board rules in India, we are not allowed to give an indication of timing.

[Mayuko Tani]

I see, okay. So what is the stage that you are now? Have you decided which -- who are the banks that you are working with and...

[Neil McGregor, executive]

Yes, we have some banks working with us as advisers.

[Mayuko Tani]

Are you ready to tell us who?

[Chiap Khiong Koh, executive]

We actually also follow the DRHP, the draft red herring. The banks that we are working with, Crédit Suisse, SBI, Access and [ CRSA ].

[Mayuko Tani]

Okay. Sorry, and under the qualification, this is the last one, in the Utility, earlier you said that you will be profitable by the end of the year. Does that mean that you will be profitable for the annual basis or you will be profitable quarterly -- on this quarterly basis at the...

[Neil McGregor, executive]

For the annual basis, for the annual basis.

[Operator]

Your next question comes from the line of Ho Pei Hwa from DBS.

[Pei Hwa Ho, analyst]

I have 2 questions. One is regarding your MOU fine last week to develop this 750-megawatt gas-fired power project in Vietnam. Any more detail from the time line -- sorry, budgeted cost? Second is regarding your renewable capacity because you said that you intend to double the capacity. So besides India, any other countries or region that we will be looking at?

[Neil McGregor, executive]

So last question first. In Vietnam, Singapore and we are also looking at other countries like the U.K. and Australia. And to come back to the first part of your question, just give it to me again?

[Pei Hwa Ho, analyst]

Regarding the new 750-megawatt gas-fired power project in Vietnam, I believe, that you signed last week, yes.

[Neil McGregor, executive]

Yes, Dung Quat, yes.

[Pei Hwa Ho, analyst]

Yes. Any like more color with regards to time line and projected cost?

[Neil McGregor, executive]

Very early stages. But these kind of developments take specifically a year of development and 3 years of execution. So about 4 years.

[Operator]

You have a follow-up question from Lim Siew Khee from CIMB.

[Lim Siew Khee, analyst]

When you mentioned about Singapore seeing margin compression, can you just elaborate the change? And do see this trend going forward? I'm trying to forecast [indiscernible] profit.

[Chiap Khiong Koh, executive]

Yes, I think -- okay. This is a -- this has a quite -- it's a good question. I think very difficult to predict what market will do. But I think, like we mentioned many times as well, most market leaders are already finding this a very tough market. So anything lower, I think, will be more problematic for people. So I think you can trend it in a rational view, that things should be more rational than a position that is unsustainable. Well, of course, quarter-to-quarter, month-to-month, there will be some compression, some improvement. So I think that's something not easily to articulate. But I think looking on a long-term basis, I think market is really feeling quite a bit of a pain in current kind of tariff.

[Neil McGregor, executive]

You also know that the Open Electricity Market started last month in Jurong and there's been healthy competition at the retail end of that business and Sembcorp power has been well represented in that market.

[Lim Siew Khee, analyst]

Okay. What is the book value for CSE?

[Chiap Khiong Koh, executive]

I don't think we have given that before, yes.

[Operator]

You have a follow-up question from Conrad from Macquarie.

[Conrad Werner, analyst]

I was hoping to also follow up on the retail market opening up and just getting a little more color on your experience there. And you already described some healthy competition on the retail end. Does that blow back to your operations in terms of energy generation? And are you -- how are you approaching this market? Are you also buying energy from third parties and reselling that? I think you talked about sort of developing this model during that strategy review?

[Neil McGregor, executive]

Yes, yes to all of those.

[Conrad Werner, analyst]

Okay. And how is it going so far?

[Neil McGregor, executive]

Yes to all of those question. To give you a little bit more color, we typically hold a larger retail position than our generation position, right? And that's no different than the consumer mass market. So it comes down to margins ultimately, in terms of retail margins versus wholesale margins. There is some rebalancing in there, but typically, the retail margins have been higher than the wholesale margin for power.

[Conrad Werner, analyst]

Okay. So over time, this should be margin accretive, if everything is kind of managed well for the Singapore business?

[Neil McGregor, executive]

Yes. But ultimately, you would expect the market over time could change. It could balance, meaning that wholesale prices could come up and retail prices could come down. It's a dynamic situation. I mean, you would change your position. That's what we mean by being more merchant -- having more merchant capability in the company to anticipate market conditions and to position our portfolio, whether it's wholesale or retail in the right trend going forward.

[Conrad Werner, analyst]

Yes, got it. And then, sorry, just one last numbers question. On the corporate expense in Utilities, the $13.4 million, again, I don't think I wrote this down completely, but what was driving that? I think it was a one-off impact there, is that right?

[Chiap Khiong Koh, executive]

Yes, that's right, correct. We were doing a bit of a restructuring, as you know, in India. So it attracted a little bit of a capital gain tax. So that's the one-off that we are seeing in this quarter.

[Operator]

Your next question comes from the line of [ Ng Jun Wei ] from UOB Kay Hian.

[Unknown Analyst]

My first question is regards to SGPL. Based on why this is definitely a prospectus, I believe that you have actually showcased what sort of tariffs you have. And from what I can see you have about 60% contracted under the short-term PPAs. So -- and then this declines to about 38% by about June, July. So I think based on what you said about you're contracted under low tariffs until September, that's about 38% of your capacity, about 500 megawatts of your capacity contracted out. So could you just, like, share some color on the outlook on whether you're making any inroads in signing some more higher-tariff, short-term PPAs for the rest of this year? That's the first question.

[Neil McGregor, executive]

Yes. Can we -- shall we stop at -- sorry, can I deal with that one right now?

[Unknown Analyst]

Sure, okay.

[Neil McGregor, executive]

So I don't have to go back and ask you to repeat again. So for SGPL, your profile is right. It's about 60% contracted. It will roll down, but we're replacing those contracts with higher-value, short-term contracts. Currently, there's no long-term contracts in the market. We believe there will be, I can't give you a date for that because it's dependent on market conditions and what the discoms actually decide there. But you've got to assume that as prices go up, they will move to intermediate and long-term contract structures. So as we move up, the expectation is that we won't just be replacing the roll-off wedge. So the wedge that you're talking about, 60% going down to 35%, say, we will also be looking to contract above 60%. And it's more likely to go towards 70%-plus, right, as we get these higher-value contracts coming in. It's a natural reaction to higher prices in the market.

[Unknown Analyst]

So if I may, just if I understand you correctly, you envision to have about 70% of your capacity and SGPL contractor under these higher-value, short-term PPAs?

[Neil McGregor, executive]

Yes. I said 70%-plus. I didn't say 70 as a number, 70%-plus.

[Chiap Khiong Koh, executive]

But we know this is on short term...

[Neil McGregor, executive]

Yes. It could be -- yes, it could also be intermediate, which means not short term. Short term is generally 1 to 2 years. Intermediate is about 5 years. And long term is anything above 10 years.

[Chiap Khiong Koh, executive]

I think what we are seeing and what our India team is saying, more medium-term PPAs are also coming up in the market. So definitely, we'll be looking at participating in some of this.

[Neil McGregor, executive]

Yes. In a rising market, it's natural that we would want to try and contract this. But we would not be looking to fully contract within that market because we believe there's some extra margin to be made by having an open or merchant position within the market because of the supply and demand dynamics. Essentially, there are challenges in India, where the inland coal plant can't get enough coal from the domestic suppliers. And secondly, they can't get enough water. We have neither of those problems at our Nellore plant because, one, we're connected to the global coal market, and two, because our water comes from desalination. So we don't have any environmental issues or any issues of leakage or theft.

[Unknown Analyst]

Understood. And just as a follow-up on that one. The price differential between a short-term and medium-term price tariff is comparable or is there a gap?

[Neil McGregor, executive]

There's a gap. I can't tell you what that gap is. I knew you would ask that question.

[Unknown Analyst]

My second question is on SGI. I think in your prepared remarks, you mentioned that it was due to lower wind speeds and...

[Neil McGregor, executive]

Yes, low wind season.

[Nancy Wei, analyst]

And -- no, lower wind season, and I think there was also a mention about low wind speeds.

[Neil McGregor, executive]

Yes, but they're both attributable to each other. In the low wind season, you get lower wind speeds.

[Nancy Wei, analyst]

Okay. So there's no weather effects that will impact the wind speeds in the -- your stronger second Q or third Q as you see it, right?

[Neil McGregor, executive]

Well, that's hard to say. It all depends on weather patterns. And generally, you expect within the higher wind seasons that the wind yield would go up. Now is that higher or lower than the average wind speed for, say, 10 years or 20 years, that's a matter of statistics. And I can't forecast them and tell you what I think is going to happen.

[Operator]

You have a follow-up question from Lim Siew Khee from CIMB.

[Lim Siew Khee, analyst]

Sorry, in terms of the masala bond repayment currently this year as a group, you actually earned the interest income from the bond, right? So that interest income, is it offset again to your finance cost as a group? And with the repayment, how much of a drop in the income would you expect? Or maybe I got it wrong, just checking.

[Chiap Khiong Koh, executive]

I think maybe from this [ outside ] point of view, there will be a reduction in interest expense because if you take the money and reduce our total loan, then the net interest would reduce. So that is probably the best way to look at it. In the call, it will be very confusing if I start explaining, but the net will be if the cash is [ reduced ]...

[Lim Siew Khee, analyst]

Okay. So this lower finance cost, it's not going to be higher finance cost because of lack of interest? Okay.

[Chiap Khiong Koh, executive]

Yes.

[Operator]

You have a follow-up question from Cheryl from UBS.

[Cheryl Lee, analyst]

A follow-up from [indiscernible] in Singapore. I seem to recall that there is going to be a further reduction in the vesting contract level from the second half of this year, if I recall correctly. I can't -- I'm not clear whether there is actually a...

[Neil McGregor, executive]

Correct.

[Cheryl Lee, analyst]

Yes. And does that actually -- so that puts sort of pressure on your margins for Singapore in the second half?

[Neil McGregor, executive]

No. Because usually typically what happens when vesting contracts come off, you would expect the wholesale prices to go up.

[Cheryl Lee, analyst]

Okay. Could you clarify a little bit?

[Chiap Khiong Koh, executive]

I think -- Cheryl, maybe look at it from another direction. Generation company needs to bring cash flow to survive.

[Neil McGregor, executive]

Yes.

[Chiap Khiong Koh, executive]

So if one higher-margin cash flow is off, that actually favors the bigger generation company because they get a small allocation. Doesn't favor us because we get less. So if that thing's out, then the bigger generation company would need to find ways to make the same money or face more losses that make it more unsustainable. So I think it comes back to finally the market position. But I think one view could be, it comes down to what we are seeing, the other view is because this whole stream of higher income is taken off, that market will self-adjust to make it more sustainable by itself.

[Neil McGregor, executive]

Yes, that's what we're saying.

[Cheryl Lee, analyst]

The wholesale [ marketable ] sector will be compensated, okay, I understand. Okay.

[Neil McGregor, executive]

Well, rationally, that's what you would expect.

[Operator]

There are no further questions at this time. I would now like to hand the conference back to today's presenters. Please continue.

[Lay Ng, executive]

Okay. Since we have no further questions, thank you very much, everybody, for calling in, and have a good afternoon ahead.

[Neil McGregor, executive]

Thank you, everyone.

[Lay Ng, executive]

Thank you.

[Chiap Khiong Koh, executive]

Bye-bye.

[Operator]

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.