Sembcorp Industries - RHB Invest 2015-12-08: Valuations Attractive After SembMarine Hits Lows

Sembcorp Industries - RHB Securities 2015-09-29: Bubbling Over With Opportunities @ SG ShareInvestor SEMBCORP INDUSTRIES LTD U96.SI 

Sembcorp Industries (SCI SP) - Valuations Attractive After SembMarine Hits Lows 

  • Sembcorp announced that it has signed a USD300m contract to build, operate and transfer what would be the largest gas-fired independent power plant in Myanmar. 
  • The stock has fallen 13% since 30 Oct, dragged down by the underperforming SembMarine, which fell 26%. 
  • As we believe SembMarine has reached sufficiently low levels, we upgrade Sembcorp to BUY on valuation grounds, with TP tweaked to SGD3.80 (from SGD3.90). 

 Project structure. 

  • The build-operate-transfer (BOT) structure will see Sembcorp Industries (Sembcorp) owning 80% of the 225-megawatt power plant in central Myanmar, with its partner MMID Utilities holding 20%. It is expected to be completed in 2018, and will supply power to the Myanma Electric Power Enterprise under a 22-year power purchase agreement. 

 Keeping with strategy of targeting developing countries with an eye on synergies. 

  • As this will be the largest, newest and most efficient plant in a country with a “severe power deficit”, we expect the plant to run near full capacity on start-up. In its statement, the company also sees this as “a foothold to potentially develop other businesses in the country, such as water and urban development”. 

 SembMarine upgraded to NEUTRAL on unprecedented valuation lows. 

  • We upgraded SembMarine (SMM SP, NEUTRAL, TP: SGD1.81) to NEUTRAL after its P/BV fell to 1.38x, well beyond the 2008 low of 1.9x. These are historical lows. After falling 26% in less than two months, we believe that most of the negatives have been factored into its price. 
  • In that upgrade note, we stated that if two Brazilian drillships were canceled, our TP could fall by 34%, which would lower our TP for Sembcorp to SGD3.40 if it came to pass – which still offers a significant upside to today’s level. 

 Utilities business appears underpriced. 

  • Even with a lower SGD1.81 TP for SembMarine, our SOP valuation for Sembcorp still works out to SGD3.80, implying that its utilities business is underpriced. 
  • With a 9.5x FY15F P/E, < 1x P/BV, and 5.2% yield, the stock now looks attractive again. 
  • Upgrade to BUY with a SGD3.80 TP based on SOP.

Lee Yue Jer CFA RHB Invest | 2015-12-08
RHB Invest SGX Stock Analyst Report BUY Upgrade NEUTRAL 3.80 Down 3.90