Sembcorp Industries - Maybank Kim Eng 2016-02-18: More Incubation Time Needed

Sembcorp Industries - Maybank Kim Eng 2016-02-18: More Incubation Time Needed SEMBCORP INDUSTRIES LTD U96.SI 

Sembcorp Industries (SCI SP) - More Incubation Time Needed 

Lacklustre Utilities performance, maintain HOLD 

  • 4Q15 PATMI of SGD60.8m (-75% YoY, -50% QoQ) missed. 
  • Other than Marine’s SGD327m loss, Utilities core performance was lacklustre as 
    1. Singapore power operations remained weak on low spark spread and 
    2. India’s TPCIL failed to break-even as guided due to an unforeseen cyclone that hampered operations. 
  • Headline 72% growth in FY15 Utilities net profit to SGD701m was helped by SGD426m of divestment gains and would have been SGD332m (-19% YoY) if one-offs were stripped. 
  • Final DPS of 6 cts brings full-year DPS to 11 cts (38% payout), slightly below our 12 cts forecast. 
  • Cut FY16-17 by 3-4% on lowered Marine and Utilities forecasts, plus higher interest. 
  • SOTP TP lifted marginally from SGD2.30 to SGD2.35 as we update component market values and book values. 

No reprieve for Singapore power market 

  • SCI expects low spark spread in the Singapore power market to persist due to excess capacity and over-commitment of piped natural gas and LNG. We do not expect to see any reprieve throughout FY16. 

Overseas ventures may need more incubation time 

  • Given the hiccups for India TPCIL in FY15, we expect the next India plant NCCPP to face similar teething issues when it comes onstream from May 2016. 
  • SCI is confident that TPCIL should at least break even in FY16 but we believe that this will be offset by startup losses in NCCPP. 
  • While it has a pipeline of projects, any significant EPS growth impact is unlikely in FY16, in our view. 

No re-rating in the near term 

  • We see no fundamental catalysts for re-rating in the near term despite its 0.7x P/BV valuation as we expect further ROE compression due to: 
    1. our negative view on SMM (SELL, TP SGD1.00)
    2. muted outlook for the domestic power market and 
    3. our expectations of a longer incubation period before overseas projects show results. 
  • Nevertheless, we note that there could be a positive stock trigger if a Temasek-led privatisation of SMM allows SCI to dispose the former. Under such a scenario, our SOTP fair value would jump to SGD2.74 based on current market value of SMM, which represents an 8% upside. 

Yeak Chee Keong CFA Maybank Kim Eng | 2016-02-18
Maybank Kim Eng Analyst Report HOLD Maintain HOLD 2.35 Up 2.30