Sembcorp Industries - OCBC Investment 2015-12-04: Overseas utilities for growth

Sembcorp Industries - OCBC Investment 2015-12-04: Overseas utilities for growth SEMBCORP INDUSTRIES LTD U96.SI 

Sembcorp Industries: Overseas utilities for growth 

 Muted year in 2015 
 Better overseas growth in 2016 
 Lower FV due to SMM 

2015 – Local power business sees lower spreads; dragged by marine 

  • 2015 has been a relatively muted year in terms of earnings for Sembcorp Industries, as 
    1. the Singapore power business was affected by an overcapacity issue which resulted in lower power spreads, and 
    2. the marine segment also dragged overall profits down due to the weak operating environment. 
  • In addition, the Indian TPCIL plant saw some initial operating losses, which is not surprising given that the plant is within its first year of operations. 

2016 – Better year for overseas utilities 

  • Beyond this, however, we expect 2016 to be a better year for the Indian plant as it overcomes teething problems; management had also earlier guided that the plant should be close to breakeven this year. 
  • Other overseas projects should also provide earnings boost once they come online. 
  • In Singapore, stiff competition may persist in the domestic power market. 
  • In the longer term, SCI has been expanding its operations steadily over the years in both the utilities and urban development segments, and we are positive on the long-term prospects of the group, given its good track record and sensible strategy of pursuing emerging market growth. 

Significant one-off gain in 4Q15 helps support dividend expectations 

  • Meanwhile, the group is expected to see a significant one-off gain this year of about S$350m from the disposal of its 40% stake in Sembsita Pacific (disposal proceeds S$489m). As such, concerns over a possible reduction of its dividend should be allayed from this move. 
  • However, with our recent decrease in fair value estimate for SembMarine, our SOTP-based fair value estimate for SCI also drops from S$4.03 to S$3.88
  • Maintain BUY; key risks include greater than expected earnings drops by SembMarine due to weak new order flows, uncertain Brazil situation and potential order cancellations.

Low Pei Han CFA OCBC Securities | 2015-12-04
OCBC Securities Analyst Report BUY Maintain BUY 3.88 Down 4.03