Sembcorp Industries - DBS Research 2016-09-28: SMM is free

Sembcorp Industries - DBS Research 2016-09-28: SMM is free SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries (SCI SP) - SMM is free

Value emerging; BUY SCI and get SMM for free! 

  • Sembcorp Industries (SCI) is trading close to its book value ex-Sembcorp Marine (SMM), which represents largely its utilities business, and implies getting SMM shares for almost “free”. 
  • If we strip out the fair value of SMM at 0.9x P/B, SCI’s utilities business is also undervalued at 0.7x P/B and 7x FY16F PE vis-a-vis its global peers’ average of 1.7x P/B and 15x PE. 
  • Our SOTP-based TP of S$3.10 translates to 0.9x P/B, which is 20-30% below the trough levels seen during the Global Financial Crisis and Asian Financial Crisis. 
  • We believe this is undemanding in view of 8% ROE and 3-4% dividend yield. 
  • Reiterate BUY on SCI.

TPCIL to ramp up in 2H16. 

  • Thermal Powertech Corporation India (TPCIL), - its first Indian power plant that has been fully operational since Sept-2015 and projected to post ~S$10m profit a quarter - made a small loss of < S$1m in 1H16 as the plant was shut down for repair and maintenance since Apr; this was guided for in May. The plant has since commenced operations in June, and profitability should pick up as 86% of the capacity has been contracted on long term Power Purchase Agreements (PPAs) effective April. The “loss of generation” in 2Q16 should be made up for in 2H16.

Emerging markets remain the growth engine. 

  • TPCIL is projected to contribute c.6% 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.


  • Given its diverse earnings stream and various listed assets, we derive our fair value for SCI based on the sum of its different parts: 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 at its Indian power plants.

Pei Hwa Ho DBS Vickers | 2016-09-28
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