RHB Securities 2015-08-05: Sembcorp Industries - 2Q15 Results. Sufficiently Corrected As Outlook Stabilises. Upgrade to BUY.

Sufficiently Corrected As Outlook Stabilises 

  • 2Q15 results were broadly in line, with core utilities PATMI jumping 17% QoQ to offset the SembMarine miss. 
  • Upgrade to BUY (vs Neutral), with a SGD3.90 TP (from SGD4.10, 13% upside) with sustainable 4.6% yield. 
  • We think the stock has fully priced in weaker Singapore power spreads and market expectations of a lower dividend following SembMarine’s cut. 
  • Valuations are beginning to look attractive at 8-9x P/Es and 1.1x experpetuals P/NAV (near FY08 1.0x P/BV lows). 

 Utilities not as bad as expected. 

  • While Sembcorp Industries’ (Sembcorp) power operations booked a loss similar to 1Q15, higher contributions from its solid waste business in Singapore boosted domestic profits by 18% QoQ. Vesting levels would fall to 25% from July, which adds a layer of uncertainty over competitors’ responses to this regulatory change. 
  • We understand a competitor’s plant faced an unplanned shutdown in July, causing power spreads to spike – which eases our concern on customers’ willingness to pay for fixed-rate contracts as well as on Singapore power profitability. 

 Rapid overseas growth supports dividend. 

  • The Thermal Powertech Corporation India (TPCIL) power plant began operations with an initial SGD9m loss. 
  • As its load factor reached 90% in June, we expect 2H15 profits to offset this loss, and for the unit to break even this year and make strong contributions in 2016. 
  • The new Sembcorp Green Infra Ltd (SGI) renewable power operations in India contributed SGD4m this quarter and management expects capacity to treble by 2020 to >2,000 megawatts (MW) from c.650MW today. 
  • We believe the stronger-than expected utilities contributions, over the medium term, would offset a weakening marine division, stabilise group earnings and sustain the dividend. 

 Sufficient correction. 

  • Sembcorp’s share price has fallen 21% since May and we believe it has priced in: 
    1. weaker Singapore power operations, 
    2. expectations of a dividend cut following Sembcorp Marine’s (SembMarine) (SMM SP, NEUTRAL, TP: SGD2.60) example. 
  • With P/Es in the 8-9x range and a sustainable 4.6% yield, value has emerged in this stock, supported by a stronger-than-expected outlook for the utilities division. 
  • We trim our FY15F/FY16F earnings by 4%/1% respectively as we impute our downgrades on SembMarine’s forecasts, but earnings may stabilise at the SGD720m level. 
  • Raise to BUY, with higher SOP-based SGD3.90 TP. 
  • Key risks are lower local power spreads and SembMarine margins and order flow.

Analyst: Lee Yue Jer, CFA

Source: http://www.rhbgroub.com/