Sembcorp Industries - DBS Research 2016-10-28: India plant turns around

SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries - India plant turns around

3Q16 utilities earnings was in line but marine segment and mark-to-market losses for Gallant Venture dragged overall earnings.
India power plant delivers encouraging profits; progressing to resolve the technical issues.
Low visibility for second India plant still awaiting long term PPA may create earnings volatility.

While we acknowledge that the marine business and ramp up in power plants in India were disappointing over the past one year, these have been priced in, in our view.
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 seems 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.
We lower our SOTP-based TP for SCI to S$2.90 following the earnings revisions, and this translates to 0.8x P/B, which is 20-30% below the trough levels seen during the Global Financial Crisis and Asian Financial Crisis.
We believe this is fair in view of 6% ROE and 3% dividend yield.
Reiterate BUY on SCI.

Thermal Powertech Corporation India (TPCIL) - SCI’s first Indian power plant which has been fully operational since Sept-2015 - has turned from a loss position of c.S$1m in 1H16 to c.S$7m profit in 3Q16. This follows the resumption of operations after the plant had been shut down for repairs in June.
We expect more stable contribution of ~S$10m profit a quarter with the commencement of long term Power Purchase Agreements (PPAs – 86% of total capacity) and resolution of technical issues.

TPCIL is projected to contribute c.5/10% of FY16/17F earnings from startup losses of S$22.5m in FY15. 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.
However, the second Indian plant Sembcorp Gayatri Power Ltd (SGPL) is coming online soon in 4Q16/1Q17 but long-term PPAs with the government may only commence in 2018. This could result in earnings volatility in the transitional year given the exposure to short PPAs and spot market.

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$2.90, translating to 0.8x P/B.

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 | http://www.dbsvickers.com/ 2016-10-28

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.90 Down 3.100