Sembcorp Industries - DBS Research 2016-01-27: Too cheap to ignore

Sembcorp Industries - DBS Research 2016-01-27: Too cheap to ignore  SEMBCORP INDUSTRIES LTD U96.SI 

Sembcorp Industries - Too cheap to ignore 


Fear over SMM privatization overdone. 

  • SCI’s share price corrected 24% YTD following market chatters over its 60.6%-owned Sembcorp Marine (SMM)’s customer, Sete Brasil’s possible backruptcy protection and SCI privatizing SMM. 
  • In our opinion, the more likely scenario of rigbuilders restructuring would be the injection of Keppel O&M into SMM. 
  • Stripping out market value of SMM, Salalah and Gallant Venture, utilities business is valued at an unjustifiably low valuation of < 5x FY16 PE vs historical mean of 11x. 
  • Our SOTP-based TP is adjusted down slightly to S$3.50, reflecting the downgrade in SMM’s TP. This translates to 1.0x P/Bv, which is 10% below GFC trough, implying 57% upside potential. 
  • We believe this is a fair multiple in view of the 10% ROE and 5% dividend yield. 

DPS uplift from divestment gains. 

  • We expect SCI to maintain similar payout of 16 Scts in FY15 (including 4 Scts interim dividend) despite the decline in recurring PATMI. 
  • The successful divestments of SembSita and Bournemouth Water, are expected to contribute 6.5 Scts to DPS, assuming a 30% payout ratio. Thereafter, DPS should normalize to 12 Scts per annum, representing a decent 4% dividend yield. 

Growing utilities business in emerging markets. 

  • The first India power plant, of which its first unit has been operational since April and the second unit in mid-Sept, had incurred total startup losses of S$21m in the past two quarters. The plant is likely to break even this year and contribute to SCI’s bottom line from 2016 onwards with better economies of scale after the second unit's ramp-up. This would mitigate earnings decline from Singapore power plants while other overseas utility businesses are expected to be stable this year. 
  • Besides, SCI has made its foray into other emerging markets – Bangladesh and Myanmar, underpinning the longer-term growth prospects of its utilities segment. 

Valuation: 

  • Given its diverse earnings stream and various listed assets, we derive our fair value on SCI based on the sum of its different parts, which include market valuations of its stakes in listed companies Sembcorp Marine (SGX-listed, 60.6% stake), Gallant Venture (SGX-listed, 11.96% stake) and Salalah (Muscat stock exchange, 40% stake) and earnings from utilities and urban development. 
  • For its holding company position, we have applied a 10% conglomerate discount to the reappraised net asset value (RNAV). 
  • Our TP is lowered slightly to S$3.50 (from S$3.80 previously) as we imputed the downgrade in SMM’s TP from S$1.85 to S$1.35. 

Key Risks to Our View: 

  • Key risks to earnings are further deferments / cancellations of marine projects, deterioration of Singapore power’s spark spread, and execution hiccups in India power plants.



Janice CHUA DBS Vickers | Pei Hwa Ho DBS Vickers | http://www.dbsvickers.com/ 2016-01-27
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 3.50 Down 3.80


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