Sembcorp Industries (SCI SP) - Maybank Kim Eng 2016-10-03: India’s Good & Bad; U/G to HOLD

Sembcorp Industries (SCI SP) - Maybank Kim Eng 2016-10-03: India’s Good & Bad; U/G to HOLD SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries (SCI SP) - India’s Good & Bad; U/G to HOLD

Downside mostly priced in; U/G to HOLD 

  • We upgrade SCI from SELL to HOLD as we believe negatives have been priced in. That said, near-term India risks could still cap upside and we would prefer to wait for India to deliver. 
  • We cut FY16-18E EPS by 4-9% for generally lower utilities segment earnings though our SOTP TP climbs slightly from SGD2.35 to SGD2.40 after rollover to FY17. 
  • We continue to value its utilities business at 7x P/E, 1SD below its 10-year mean.

Singapore power impact diminished 

  • Uniform Singapore Energy Price (USEP) has stabilised at SGD50/MWh or so, suggesting a possible bottom. 
  • Although we don’t think a strong rebound is likely before 2018 with the industry’s supply cushion still at 30% and gencos overcommitting to gas supply, Singapore power contributions to utilities’ profits had shrunk from 40-50% in 2013 to only 11-16% in 1H16.

India a lift or a drag? 

  • We expect TPCIL to start delivering from 3Q16, after resolving its technical glitches, improving its plant load factors and securing longterm PPAs. But this could be partly negated by start-up losses at SCI’s second 1,320MW India power plant, Sembcorp Gayathri Power (SGPL), from 3Q16. 
  • Worryingly, SGPL still does not have any long-term PPAs and will need to depend on the merchant market and short-term PPAs of 388MW. We forecast profitability for SGPL only in 2018. But after several quarters of misses from TPCIL, we think that the market’s expectations for India may have tempered to more realistic levels.

Cheap but not ready for re-rating 

  • India seems to be the only major source of earnings growth for utilities in FY17-18E, though there remain uncertainties over long-term PPAs for SGPL. We believe that other overseas projects may only contribute after FY18, which could cap utilities segment ROEs at 7% levels in FY16-18E.
  • This justifies our below-mean, below-peer stub valuation for the segment. Upside risk could come from a lucrative long-term PPA for SGPL while the downside would be an extended period of startup losses. 
  • While we are also negative on SMM SP (SELL, TP SGD1.00), that is already in our valuations and near-term oil price sentiments on OPEC cut and potential shipyard restructuring could be another upside risk.

Yeak Chee Keong CFA Maybank Kim Eng | 2016-10-03
Maybank Kim Eng SGX Stock Analyst Report HOLD Upgrade SELL 2.40 Up 2.350