Sembcorp Industries - RHB Securities 2015-09-29: Bubbling Over With Opportunities

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SEMBCORP INDUSTRIES LTD U96.SI 

Sembcorp Industries - Bubbling Over With Opportunities 

• A week after the sale of its Australian waste disposal business, Sembcorp announced that it is investing USD390m in its first power plant in Bangladesh. 
• Maintain BUY with an unchanged SGD4.20 TP (22% upside). 
• We view this as a natural progression following its heavy investments in Indian utilities, and believe the power plant will generate 15-20% IRR, following its completion in FY18. 

 Toehold into the fast-growing Bangladeshi market. 

• Sembcorp Industries’ (Sembcorp) first combined cycle power plant in Bangladesh, in the Sirajganj district, will have a capacity of 426MW, fueled primarily by natural gas with high-speed diesel as back-up fuel. 
• Bangladesh represents a high-potential, fast-growing market as only three-quarters of its estimated 11,500MW of power generation capacity is considered “available”, and a third of the power generated is reportedly lost in its inefficient transmission and distribution network. 
• Meanwhile, its GDP is forecasted to be growing at > 6% a year (despite the power losses) over the next 15 years, with the Bangladesh government planning to add 10GW of capacity over the next decade. 

 71%-owned BOO joint venture. 

• Sembcorp will own 71% of the power plant, with the other 29% owned by the North-West Power Generation Company, a subsidiary of the Bangladesh Power Development Board. Sembcorp will build, own and operate (BOO) the plant, with a 22.5-year power purchase agreement signed. 

 Efficient capital redeployment. 

• We estimated the Australian waste management business sale multiples at 3.6x P/BV and 14x-16x P/E. In contrast, this new investment should yield 15-20% IRR. This represents an efficient recycling of capital. 
• Sembcorp still has excess funds remaining from its AUD482m sale, after its USD68m equity investment at a 75-25% debt-equity ratio, to deploy into additional projects. 

 Maintain BUY with an unchanged SGD4.20 TP. 

• Although the power plant will only begin contributions in FY18, it provides yet another visible source of long-term growth, underpinning our confidence in Sembcorp’s under-appreciated utilities business. 
• Key risks are execution risks for its overseas projects and order deferrals for its rig building division.

Lee Yue Jer CFA RHB Securities | http://www.rhbgroub.com/ 2015-09-29

RHB Securities Analyst Report BUY Maintain BUY 4.20 Same 4.20