Sembcorp Industries - DBS Research 2017-02-24: Slowly but surely

Sembcorp Industries - DBS Vickers 2017-02-24: Slowly but surely SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries - Slowly but surely

  • 4Q16 results broadly in line; Final DPS was 4 Scts, bringing FY16 DPS to 8 Scts.
  • Second India power plant commenced full operations in Feb 2017.
  • 2017 a transition year; new capacity in India and China will drive growth in 2018.
  • Reiterate BUY; TP lifted to S$3.80.


BUY SCI; TP lifted to S$3.80

  • BUY SCI; TP lifted to S$3.80, after imputing higher valuation for Sembcorp Marine (SMM; from S$1.55 to S$1.78) and higher PE multiple (raised from 11x to 15x) for utilities business. 
  • Sembcorp Industries (SCI) offers the best risk reward among the three Offshore & Marine (O&M) large caps, trading at an undemanding 0.9x P/BV. It offers a unique value proposition, as a proxy to ride the cyclical O&M upturn and has a defensive utilities business. 
  • Our TP translates to 1.0x P/BV. We believe this is fair in view of its 6% ROE and 2% dividend yield. 
  • Reiterate BUY on SCI.



Look beyond the transitional 2017. 

  • While Thermal Powertech Corporation India (TPCIL) - SCI’s first Indian power plant- is starting to contribute more steadily at S$8-10m a quarter to bottomline, profits could be offset by startup losses of its second plant, Sembcorp Gayatri Power Ltd (SGPL), which just came online in Feb-2017. SGPL’s profitability will be more volatile as it is exposed to spot and short term markets, until its secure a longterm Power Purchase Agreements (PPA) from 2018 onwards. 
  • In China, there is a “loss of income” of c.S$40m following the expiry of its YangCheng power plant at the end of 2016, while the new Chongqing plant will probably contribute more meaningfully from next year. As a result, utility segment may see a 10-15% dip in earnings in 2017 before resuming growth next year.


Emerging markets remain the growth engine. 

  • SCI has also made forays into other emerging markets - Bangladesh and Myanmar - and this should underpin the longer-term growth prospects of its utilities segment beyond 2018. 
  • Long-term PPAs have been secured for both Myanmar’s 230MW gas fired Myingyan Independent Power Producer (IPP) and Bangladesh’s 427MW gasfired Sirajganj Unit 4. Construction of the plants are on track and are expected to commence operations in 2H18.


Valuation

  • Given its diverse earnings stream and various listed assets, we derive our fair value for SCI based on the sum of its different parts: 
    • market valuations of its stakes in listed companies Sembcorp Marine (SGX-listed, 60.6% stake), 
    • Gallant Venture (SGX-listed, 11.96% stake) and 
    • Salalah (Muscat stock exchange, 40% stake) and 
    • earnings from utilities and urban development.
  • For its holding company position, we have applied a 10% conglomerate discount to the reappraised net asset value (RNAV).
  • We derive a TP of S$3.80, translating to 1.0x P/BV.


Key Risks to Our View

  • Key risks to earnings are further deferments/cancellations of marine projects, deterioration of Singapore's power spark spreads, and execution hiccups at its Indian power plants.




HO Pei Hwa DBS Vickers | http://www.dbsvickers.com/ 2017-02-24
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 3.80 Up 3.100



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