Sembcorp Industries - CIMB Securities 2015-09-02: Utilities discounted.


Utilities discounted 

  • We believe the market has under-appreciated SCI’s utilities business as its implied valuation is at 6x CY16 P/E, below its historical average of 7x. 
  • Potential catalysts could come from stronger-than-expected power prices in Singapore and higher profits from India power plants. 
  • We maintain our Add rating but lower our SOP-based target price ($3.86) to incorporate our reduced target for SMM. 
  • We also cut our FY16-17 EPS forecasts to account for our lower new orders assumptions and the deferral of Sete Brasil projects in SMM. 

Don’t forget the recurring streams in Singapore 

  • We believe that even with lower power prices, Singapore Utilities will still be profitable, generating c.S$133m in net profits during FY15-17, based on the recurring long-term contracts from solid waste, water, gas and steam. 
  • We have assumed a S$6m quarterly loss for Singapore power in 3Q15-4Q15 and a S$7m quarterly loss in FY16-17 to account for lower VC. Earnings upside could stem from rational market behaviour, as the market adjusts to higher tariffs. 

India is on track 

  • TPCIL unit 1 has been consistently operating in the 90-100% plant load factor (PLF) range since Jun-15. Unit 2 is going through grid synchronisation and should start commissioning by Sep-15. SCI‟s second power plant in India, NCCPPL is also on track with unit 1 targeted to be operational by 2H16. 
  • India will contribute 10-20% to Utilities' earnings in FY16-17. 

Privatisation of SMM not likely in the near term 

  • We believe the likelihood of SMM privatisation is low in the near term given the multiple headwinds faced by SMM. SCI's attempt to privatise SMM in 2002 was to capture bigger profits from the cash generating ship-repair and booming rig building cycle. The privatisation was also aimed to offer synergy with SMOE (topside and platform fabrication), which was previously parked under Utilities. SMOE was subsequently sold to SMM in 2007, optimising the land use at Admiralty yard and Batam. 
  • Since then, Utilities have grown, extending from its Singapore base to an internationally integrated water and power company, partly funded by the cash dividend received from SMM. 
  • Given the potential cash burn from more project deferrals, we believe privatising SMM could drain SCI group' cashflow and stall sizeable M&A plans for Utilities to meet its vision of 10,000MW power capacity target (currently c. 8,700MW). 

LIM Siew Khee | CIMB 2015-09-02
ADD Maintain ADD 3.86 Down 4.02