RHB Research 2015-07-02: SembCorp Industries - Maintain NEUTRAL, with a lower SGD4.10 SOP TP

Maintain NEUTRAL, with a lower SGD4.10 SOP TP (5% upside). 

  • Sembcorp announced it has obtained exclusive rights to develop a 750ha integrated township and industrial park in the Nghe An Province in Vietnam. 
  • This is its seventh such project, which operates on a decade-long timescale and we see no near-term financial impact. 
  • Both its utilities and marine divisions continue to suffer due to strong macro headwinds. 

Seventh VSIP JV project. 

  • The Nghe An infrastructure project is the seventh such for the Vietnam Singapore Industrial Park Joint Venture Co (VSIP JV). 
  • With surveying, planning, approvals and eventual construction to take multiple years, we do not anticipate any near-term financial impact from this latest project, which is one of many ultra longterm jobs undertaken by Sembcorp Industries’ (Sembcorp) infrastructure unit. 

Multiple threats to Singapore utilities’ profitability next year. 

  • Hyflux’s 411MW plant will be connected to the grid in 2H15, adding c.3% additional capacity to Singapore’s already oversupplied market (total licensed capacity was c.82% above peak demand in 2014). 
  • We believe it could take 3-5 years for demand growth to substantially trim this oversupply. 
  • Further threats to near-term profitability are: 
    1. customers renegotiating fixed-rate contracts downwards using 1Q15 pool prices as benchmarks, 
    2. percentage of power generation sold through vesting contracts is being lowered, 
    3. increasing take-up by consumers of solar power generation panels, 
    4. Tesla’s (TSLA US, NR) PowerWall (or similar products), a rechargeable lithium-ion battery aimed at the residential market which synergises well with solar panels and which together will slow the growth of overall grid demand. 

Trimming estimates and lower TP pre-emptively. 

  • In view of these issues, and the additional threats of rig delivery delays and Brazil yard issues by SembMarine’s customers, we trim FY15F/FY16F EPS by 2/10%, while our DPS outlook dips by 1 cent for both years to 16 cents. 
  • Our SOP-based TP also drops to SGD4.10 (from SGD4.40). 
  • While the stock is inexpensive, at < 10x P/E and 4.1% yields, the time required for a recovery exceeds our 12-month horizon – making this stock more suitable for long-term income investors.

(Lee Yue Jer, CFA)

Source: http://www.rhbgroup.com/