Sembcorp Industries - Maybank Kim Eng 2016-05-05: Take Profit

Sembcorp Industries - Maybank Kim Eng 2016-05-05: Take Profit SEMBCORP INDUSTRIES LTD U96.SI 

Sembcorp Industries (SCI SP) - Take Profit 

Results missed; D/G to SELL 

  • 1Q16 PATMI of SGD107m (+76% YoY, -25% QoQ) missed, forming 21%/19% of our/consensus’ FY16E. 
  • Utilities segment continued to be dragged by weak Singapore power operations from spark spread compression while India’s TPCIL disappointed. 
  • We think that SCI’s surge from the Jan 2016 low of SGD2.19 was on views that it is unlikely to raise its stake in SMM. 
  • In our view, this is mostly priced in and risk is now negatively skewed. 
  • We trim FY16-18E by -3.0% to +0.5% mainly for SMM adjustments. 
  • Downgrade from HOLD to SELL, with unchanged SOTP-TP of SGD2.35. 

Utilities uninspiring 

  • We expect Singapore’s power market to remain oversupplied in 2016 keeping spark spread suppressed. 
  • India’s TPCIL just broke even in 1Q16 and had an unforeseen downtime due to technical fault. This would see unit #2 shut from early-Apr to mid-May leading to lost income in 2Q16. But management maintains its guidance for FY16 profitability given that 86% of its net capacity is now secured with long-term PPA. 

Emerging market projects may disappoint initially 

  • Another India power project NCCPP is expected to commence operations from mid-2016. 
  • We are concerned that SCI’s pipeline of greenfield projects in emerging countries (India, Myanmar, Bangladesh & China) may face similar delays and startup issues as India’s TPCIL. These power plant projects require heavy initial capex but may take a few years before payoffs are evident. Therefore we expect Utilities ROE to compress from previous 10-12% levels to c.7-8% in FY16-18E. 

Risk-reward skewed to downside 

  • Our model suggests limited upside (+6%) even if SMM is disposed at a 20% premium, but downside of 15% if SMM falls to our fundamental value. 
  • A re-rating of Utilities segment would be a stronger stock driver but with Singapore power business suppressed and greenfield emerging market project risks, we see limited scope for re-rating. This justifies our 1SD below-mean valuation of 7x FY16E P/E. 
  • While the market argues that Utilities is undervalued relative to peers’ 11-13x P/E, we note that post GFC, implied Utilities P/E has never been above 11x even in good times.

Swing Factors


  • 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.


  • 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 | 2016-05-05
Maybank Kim Eng Analyst Report SELL Downgrade HOLD 2.35 Same 2.35