Sembcorp Industries - CIMB Research 2015-12-08: Implied utilities at trough book value

Sembcorp Industries - CIMB Research 2015-12-08: Implied utilities at trough book value SEMBCORP INDUSTRIES LTD U96.SI 

Sembcorp Industries - Implied utilities at trough book value 

  • We think SCI's utilities business has been overly discounted. The market is valuing its utilities business at c.S$2.3bn or trough valuation of 0.6x P/BV. 
  • We reduce our EPS by 3-7% to account for our recent earnings downgrades for SMM. 
  • Our SOP valuation also drops to S$3.85 accordingly. 

Defying cyclicality 

  • We forecast an average earnings growth of 14% for FY16-17 with the commissioning of the two power plants in India (TPCIL and NCCPP). This should plug the gap arising from SMM’s weakness given the challenging offshore & marine market. 
  • Its focus on emerging markets, which involve distressed water/power assets and encompasses Vietnam, the Middle East and China, has also paid off and these assets now contribute steady earnings (40% of utilities’ earnings). 

More emerging market projects 

  • The two power projects in Bangladesh (US$390m) and Myanmar (US$300m) mark SCI’s maiden foray into these new emerging markets, with more to come. 
  • We expect both projects to contribute c.S$25m in total to utilities profit by 2019. SCI’s success in executing greenfield projects sets it apart from international players which have mostly grown via M&As. 

Lower utilisation for TPCIL in 4Q15 due to floods 

  • The recent heavy rains and floods in South Indian cities could have disrupted the power generation activities of TPCIL, in our view. 
  • The average utilisation in Oct-early Dec dropped to c.70% from c.90% in 3Q15. 
  • Depending on how the weather pans out, TPCIL may not achieve breakeven by 4Q15 as it had previously guided. 
  • We have expected zero earnings contribution from India in FY15. 

Retaining dividend 

  • We believe SCI is likely to retain its dividend of S$0.16 for FY15 (interim DPS: S$0.05), backed by the divestment gain of S$350m from the sale of its stake in SembSita Pacific Australia. This translates into a 5% dividend yield. 
  • We expect to see more divestments of non-core businesses such as Shenzhen Chiwan Sembawang Engineering, Singapore Mint and Gallant Venture to ease working capital pressure stemming from SMM. 

Accounting for SMM 

  • We maintain our Add call on SCI but we cut our FY15-17 EPS by 3-7% to incorporate our recent earnings downgrade for SMM. 
  • Our target price, still based on SOP, slides accordingly. 
  • Key catalysts could come from 
    1. settlement of Sete Brasil issues for SMM, 
    2. rebound in oil prices, and 
    3. divestment of non-core assets. 
  • We still see share price upside of c.13% in our SOP valuation if we apply a worse-case valuation for SMM, at 2 s.d. below its historical mean or 7.7x CY17 P/E.

LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2015-12-08
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 3.85 Down 3.91