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
- settlement of Sete Brasil issues for SMM,
- rebound in oil prices, and
- 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
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http://research.itradecimb.com/
2015-12-08
CIMB Securities
SGX Stock
Analyst Report
3.85
Down
3.91
