DBS Vickers 2015-08-05: Sembcorp Industries - 2Q15 Results. Time to re-visit. Upgrade to BUY.


Upgrade to BUY; India growth to mitigate weakness in Singapore. 

  • SCI has corrected 28% since end-April following disappointing 1Q15 results and uninspiring outlook guidance. 
  • 2Q15 was decent. While the Singapore power business remains under pressure, we could expect the ramp-up in India power plants to drive sequential improvement. 
  • Valuation is undemanding, with 19% upside potential to our new TP of S$4.10. 
  • Upgrade to BUY

India a new growth engine. 

  • The first unit of TPCIL’s power plant in India, operational since April, incurred S$9m startup losses in 2Q15. 
  • The plant is likely to breakeven this year and contribute to SCI’s bottomline from 2016 onwards with better economies of scale after the second unit is operational towards the end of 2015. 
  • This would mitigate earnings decline from Singapore power plants. 
  • Elsewhere, other overseas utilities businesses are expected to be stable this year. 

Revised down marine earnings. 

  • SCI’s 2Q15 results were largely in line. 
  • Stripping out one-off gain of S$54.7m arising from divestment of Sembcorp Bournemouth Water Investment, core PATMI grew c.20% q-o-q to S$169m, bringing 1H15 figures to S$311m or 43% of our full year estimate. 
  • We are keeping our utilities earnings largely intact but revising down marine earnings to reflect adjustment in SMM earnings forecast. 
  • As a result, FY15-16 PATMI forecasts are trimmed by 5-6%. 


  • Given its diverse earnings stream and various listed assets, we derive our fair value on SCI based on the sum of its different parts, which include 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). 
  • Our TP is adjusted slightly lower to S$4.10 following revision in SMM’s earnings and TP. 

Key Risks to Our View: 

  • Key risks to earnings are further deterioration of Singapore power’s spark spread, execution hiccups in India power plants and deferments in marine projects.

Analyst: HO Pei Hwa

Source: http://www.dbsvickers.com/