Sembcorp Industries - CIMB Research 2015-12-09: All eyes on India

Sembcorp Industries - CIMB Research 2015-12-09: All eyes on India SEMBCORP INDUSTRIES LTD U96.SI 

Sembcorp Industries - All eyes on India 

  • India will dominate 20% of utilities earnings by 2017 of our forecast with two coalfired plants. 
  • We think the utilities business has been overly discounted, as it is trading at a 2017F P/E of 6x, below its historical average of 7x. 
  • We maintain our Add rating and target price of S$3.85 based on SOP valuations. Re-rating catalysts could come from stronger-than-expected profitability in India and Singapore. 

■ TPCIL in full force in 2016 

  • We expect TPCIL to turn around from losses to contribute about S$25m-30m of profit in 2016, as both unit unit 1 and 2 have been operating above a 90% plant load factor since Sep 15. 
  • India will contribute c. 10% of utilities’ earnings according to our forecast. 

■ NCCPP on track 

  • The second power plant, NCC Power Projects Limited (NCCPP), is a 1,320MW unit that will achieve phase 1 completion by 2H16. 
  • Given the learning curve encountered in TPCIL, we deem the targeted completion for NCCPP achievable. 
  • SCI is bidding for a 500MW long-term PPA in Andhra Pradesh, securing baseload ahead of the completion of NCCPP’s first unit. 

■ Spark spread may remain stable in 2016 

  • We expect spark spread to remain stable in 2016 despite a lower vesting contract level of 20%, as gencos may behave rationally to preserve cash profits. 
  • We see potential for earnings upside in FY16-17, as we have factored in wider losses of S$7m-8m losses/quarter. However, pending the ongoing restructuring of JAC, there might be a need for further provision for doubtful debts in 4Q15 and 1Q16. 

■ Steep discount for utilities business 

  • Excluding SMM’s contribution to SCI’s SOP valuation, its utilities business is trading at an implied 6x CY17 P/E, below its historical average of 7x forward. 
  • It is also trading at 0.6x P/BV or -2 s.d of its historical average, suggesting that market is discounting the utilities for the potential share price overhang from SMM.

LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2015-12-09
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