Sembcorp Industries - DBS Research 2016-02-18: SMM Privatisation Rumour Unsubstantiated

Sembcorp Industries - DBS Research 2016-02-18: SMM Privatisation Rumour Unsubstantiated SEMBCORP INDUSTRIES LTD U96.SI 

Sembcorp Industries - SMM Privatisation Rumour Unsubstantiated 

  • 4Q15 affected by losses from Marine and slower ramp up of Indian power plant (TPCIL).
  • TPCIL will contribute positively from 1Q16, with >80% utilisation since end Dec-15.
  • Declared final DPS of 6 Scts; FY15 DPS at 11 Scts on similar 36% payout ratio.
  • SMM privatisation chatter unsubstantiated; Reiterate BUY, TP adjusted to S$3.30. 


Utilities’ steep discount unwarranted. 

  • Stripping out the market value of Sembcorp Marine (SMM), Salalah and Gallant Venture, SCI’s utilities business is valued at an unjustifiably low 0.5x P/B and 5x FY16F PE vs historical mean of 11x PE. 
  • We have lowered our SOTPbased TP to S$3.30, reflecting the downgrade in SMM’s TP. This translates to 0.9x P/B, which is 20-30% below GFC/AFC trough, implying 30% upside potential. 
  • We believe this is a fair multiple in view of 9% ROE and 4% dividend yield. 
  • Reiterate BUY. 

Chatter on SMM privatisation does not hold water. 

  • SCI’s PATMI slid 75% y-o-y and 50% q-o-q to S$60.8m in 4Q15, due to Marine losses (S$328m), and impairment (S$70m) charges on Utilities’ PPE. 
  • In response to the privatization rumour of SembCorp Marine, management stressed that any asset acquisitions should be accretive and enhance returns to SCI shareholders. 
  • Moreover, there are more appealing opportunities in the utilities space in view of the lacklustre marine prospects. 
  • In our view, the more likely scenario of a restructuring of rigbuilders would be the merger of Keppel O&M and SMM. 
  • As such, the elimination of fear of privatisation could give an uplift to SCI’s stock prices in the near term. 

Emerging markets the growth engine. 

  • SCI’s first India power plant, fully operational since Sept-2015, is expected to contribute S$70m or 12% of FY16F PATMI. 
  • It incurred startup losses of S$22.5m last year, but is expected to turn profitable in 1Q16 with the ramp-up to > 80% since end 2015. This would help to mitigate the earnings decline from Singapore power plants while other overseas utility businesses are expected to be stable this year. 
  • Besides, SCI has also made its forays into other emerging markets – Bangladesh and Myanmar, underpinning 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$3.30 (from S$3.50 previously) as we imputed the downgrade in SMM’s TP. 
  • We revised FY16-17F earnings down by 6-8%, factoring in weaker SMM earnings. 

Key Risks to Our View: 

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


Janice CHUA DBS Vickers | Pei Hwa Ho DBS Vickers | http://www.dbsvickers.com/ 2016-02-18
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 3.30 Down 3.50


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