Sembcorp Industries - RHB Invest 2016-02-18: “Why Look Inward? Look Outward!” …

Sembcorp Industries - RHB Invest 2016-02-18: “Why Look Inward? Look Outward!” … SEMBCORP INDUSTRIES LTD U96.SI 

Sembcorp Industries - “Why Look Inward? Look Outward!” … 

  • … was the most interesting take away from the analyst briefing, ie CEO’s response to the expected query regarding SembMarine’s potential privatisation. 
  • This stock is now a conviction BUY with a revised SOP-based SGD4.00 TP (from SGD3.80, 58% upside) driven by a strong utilities projects pipeline. 
  • We note that the non-marine business trades at effectively 0.54x FY15 ex-perpetual P/BV. 

CEO Mr Tang Kin Fei prefers to deploy cash in the utilities business. 

  • The “look outward” message was coupled with a reminder that “Whatever decisions [Sembcorp Industries (Sembcorp) makes] will have to be accretive to shareholders”. 
  • Sembcorp currently trades at 0.80x FY15 P/BV and 7x FY16F P/E vs Sembcorp Marine’s (SembMarine) (SMM SP, NEUTRAL, TP: SGD1.33) 1.35x P/BV and 12x P/E respectively. 
  • A privatisation now would certainly not be EPS-accretive, and we view the market speculation as simply that. 

Dividend trimmed to 11 cents. 

  • A final dividend of 6 cents was declared. The total dividend represents a payout ratio of 36%, equal to that of FY14. 
  • The new Indian power plants already online are now generating cash, and we expect an earnings rebound and higher dividends this year. 

India to be Sembcorp’s breath of life. 

  • Sembcorp’s new Thermal Powertech Corporation India Ltd (TPCIL) plant has been operating at > 85% capacity since Jan 2016, which should take it well into profitability. This should breathe new life into the hitherto moribund utilities division after two years of declining core earnings, which could now rebound. 

Conviction BUY for growing utilities business. 

  • At 0.54x P/BV, after stripping out the perpetuals and SembMarine, this stock is now a conviction BUY. 
  • Sembcorp now has 10,616 megawatts (MW) of power general capacity, with 3,800MW coming online through FY18. It also has 9.2 cu m/day of water capacity, with 1.3 cu m/day in the pipeline. These should drive utilities earnings growth, netting out the weaker SembMarine, which now appears clearly overpriced relative to its parent.

Lee Yue Jer CFA RHB Invest | 2016-02-18
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