Sembcorp Industries - Maybank Kim Eng 2016-01-19: Most Oversold but No Catalysts

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SEMBCORP INDUSTRIES LTD U96.SI 

Sembcorp Industries (SCI SP) Most Oversold but No Catalysts 

Two worries, not one; maintain HOLD 

• SCI appears oversold if SMM was the sole factor. But we think a de-rating of its Utilities business also played a part. 
• We now incorporate our SGD1.00 TP for SMM and a lower 7x P/E (-1SD of mean, from 11x) for its Utilities business. 
• Our SOTP TP drops from SGD3.53 to SGD2.30. Maintain HOLD. 
• We cut FY15-17 EPS by 10-18% for lower Marine contributions. 
• In the worst case of a zero value for SMM, our SOTP drops to SGD1.67, 34% below its current price. 

ROE compression for Utilities 

• Our stub-analysis indicates that SCI ex-Marine is trading at 0.5x P/BV, its lowest since 2008. But this is partly justified by ROE compressing from 12% to 8%, due to domestic power-price pressures and start-up losses at TPCIL, India. 
• While ROEs may improve when TPCIL ramps up and other overseas projects such as India’s NCCPP and UAE’s Fujairah IWPP kick in fully, we think this could be erased by equity investments in greenfield projects in Bangladesh and Myanmar. These would most likely produce low income in their start-up years, just like TPCIL. 

No catalysts for re-rating 

• SMM still presents downside risks. We believe that investors will discount Utilities’ long-term prospects and focus on current stock-market weakness. 
• Until and unless its utility ROEs improve, we do not foresee a re-rating. … but support from divestment gains, reinvestments SCI will recognise more than SGD400m of divestment gains from Bournemouth Water, SembSita and Zhumadian China Water in FY15. 
• This testifies to its ability to generate value for shareholders. It has reinvested in new ventures in Bangladesh, Myanmar and China for longterm growth.

How we value Utilities 

• We lower our P/E from 11x to 7x for the following: 
  • ASEAN utilities trade at 11x on average and China peers, 6x. Their ROEs are above 10% on average. 
  • SCI’s ex-SMM ROE has slid from 12% to 8%. It is not expected to expand again anytime soon. 
  • After GFC and before SCI’s ROE compression, SCI ex-SMM was trading at 6-11x P/E. 
  • With lower ROEs and heightened equity-market risks, we deem it fair to price Utilities at 7x P/E, -1SD of its 8-year mean.

Swing Factors 

Upside 

• TPCIL in India ramps up and turns profitable in 1H16. 
• Spark spread in Singapore’s power market stabilises or reverses its downtrend. 
• SMM reverses its stock-price slide on any oil-price rebound or acquisition by Temasek at premium price. 

Downside 

• Massive order cancellations and writedowns at SMM. 
• SCI needs to rescue SMM with equity or privatisation on unfavourable terms. 
• Utility projects in India and Middle East fail to contribute as expected. 
• Singapore power prices fall, further impairing margins.

Yeak Chee Keong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-01-19

Maybank Kim Eng Analyst Report HOLD Maintain HOLD 2.30 Down 3.53