Sembcorp Industries - DBS Research 2016-05-05: Slowly but steadily

Sembcorp Industries - DBS Research 2016-05-05: Slowly but steadily SEMBCORP INDUSTRIES LTD U96.SI 

Sembcorp Industries - Slowly but steadily

  • 1Q16 below, dragged by underperformance of SMM and TPCIL
  • Trimmed FY16-17F earnings by 6-8%
  • TPCIL to contribute more meaningfully in 2H16
  • Reiterate BUY; TP adjusted to S$3.10



Valuation of utilities business remains undemanding. 

  • Stripping out the fair value of Sembcorp Marine (SMM) and market value of Salalah and Gallant Venture, SCI’s utilities business is valued at an undemanding 0.7x P/B and 7.8x FY16F PE vs historical mean PE of 11x. 
  • Our SOTP-based TP is lowered to S$3.10 following the earnings revisions. This translates to 0.9x P/B, which is 20-30% below the troughs seen during the Global Financial Crisis and Asian Financial Crisis. 
  • We believe this is a fair multiple in view of 8% ROE and 4% dividend yield. 
  • Reiterate BUY.


TPCIL to contribute more meaningfully in 2H16. 

  • SCI’s net profit slid 25% y-o-y to S$107m in 1Q16, as contribution from Marine profit had halved to S$33.5m. Net contribution from Utilities was flattish, up only 1% y-o-y to S$75.2m. 
  • TPCIL - its first Indian power plant that has been fully operational since Sept-2015 - which we had earlier projected to post S$10-15m profit in the quarter, was merely at breakeven due to the weak spot market. The plant also experienced some technical issues and has been shut down for repair and maintenance since Apr, to resume operations in May. 
  • Hereon, profitability should pick up as 86% of the capacity has been contracted on long term Power Purchase Agreement (PPA) effective Apr. 
  • We have trimmed our FY16-17F earnings by 6-8%, factoring in our earnings adjustment for SMM and deferred contribution from TPCIL.


Emerging markets remain the growth engine. 

  • We now expect TPCIL to contribute S$45m (vs S$70m previously) or 8% of FY16F earnings from startup losses of S$22.5m last year. 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 forays into other emerging markets - Bangladesh and Myanmar - and this should underpin the longer- term growth prospects of its utilities segment.


Valuation:

  • Given its diverse earnings stream and various listed assets, we derive our fair value for 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). We derive a TP of S$3.10, translating to 0.9x P/B.


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.





Pei Hwa Ho DBS Vickers | http://www.dbsvickers.com/ 2016-05-05
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 3.10 Down 3.30


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