Sembcorp Industries - RHB Securities 2015-09-22: Record Profits Incoming On Sale Boost


Sembcorp Industries (SCI SP) - Record Profits Incoming On Sale Boost 

  • The AUD485m sale of Sembcorp’s Australian waste management business is expected to book a SGD350m sales gain, equal to 49% of FY15’s recurring income and boosting FY15F reported profit to a >SGD1bn record. 
  • Maintain BUY with a higher SGD4.20 TP (from SGD3.90, 20% upside). 
  • Sales multiples of c.3.6x P/BV and 14-16x P/Es are >1.1x ex-perpetuals P/BV and >9x P/E valuations, indicating market undervaluation of its sales-realisable value. 

 The deal and multiples. 

  • Sembcorp Industries (Sembcorp) is to divest its 40% stake in Australian waste management joint-venture (JV) SembSita Pacific Pte Ltd to the 60% partner Suez Environment Asia Ltd for AUD485m. Australian Foreign Investment Board Review approval is still required and the company expects completion in 4Q15. 
  • We calculate the sale P/BV to be 3.6x (assuming AUD/SGD parity) and estimate the sale P/Es to be 14-16x. Both multiples are well ahead of Sembcorp’s own valuations, which are at merely 1.1x ex-perpetuals P/BV and c.9x P/Es. 

 Financial impact. 

  • Sembcorp expects a SGD350m gain for FY15, boosting reported earnings of 49%/50% relative to our/consensus recurring income estimates respectively. 
  • We trim FY16F/FY17F recurring earnings by 4.1%/4.5% respectively as SembSita would stop contributing from 1Q16 onwards. Even so, we highlight the (in our view, high) probability that management would reinvest the AUD485m proceeds, which could then reverse this trim. 

 Other thoughts. 

  • Though Sembcorp has in the past distributed special dividends of up to 2 cents/share, we prefer to err on the side of caution and merely expect a stable dividend YoY. This is on the high capex and working capital requirements of Sembcorp Marine (SembMarine) (SMM SP, NEUTRAL, TP: SGD2.60) this year. Any special dividend would be a bonus. This sale does lend greater confidence in the sustainability of Sembcorp’s dividend. 
  • We also understand that it was approached by the buyer for this asset and similarly for the previous Bournemouth sale, would divest assets only at what it deems are good prices. 

 Raise TP to SGD4.20 (from SGD3.90). 

  • This divestment confirms our belief in the value of Sembcorp’s overseas utilities businesses. We raise our SOP-based TP to SGD4.20, equivalent to 1.33x ex-perpetuals current P/BV. 
  • Key risks are its overseas projects’ execution risks and order deferrals at its SembMarine subsidiary. 

Lee Yue Jer CFA RHB Securities | 2015-09-22
RHB Securities Analyst Report BUY Maintain BUY 4.20 Up 3.90