Sembcorp Industries - OCBC Investment 2016-11-23: Well-positioned to seize opportunities

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SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries - Well-positioned to seize opportunities

• Good track record.
• Capturing emerging market growth.
• More plants starting up.

Warrants a spot in the long-term investor’s portfolio 

• Most investors would normally wish to hold a company that provides good ROEs over the long term, made possible by a competitive advantage that may not be easily replicated by others (an economic moat, perhaps) and providing goods or services that would always be valued by society.
• As a leading developer, owner and operator of energy and water assets with strong operational, management and technical capabilities, Sembcorp Industries has grown its operations to 14 countries and looks set to cement its presence in Asia. 
• Though its marine segment is facing headwinds, the longer term outlook for the utilities segment remains positive, and the group is well-positioned to seize emerging market opportunities with its strong track record in 
  1. generating and supplying power, steam and natural gas, and 
  2. providing total water and wastewater solutions for industries.

More utilities assets starting up 

• In the nearer term, Sembcorp is also expecting more power assets start up. Looking ahead, the commercial operations date (COD) of unit 3 of the SGPL plant in India is expected to be in 4Q16, while unit 4’s COD is expected to be in early 2017. SGPL is working to secure long-term PPAs, besides the short-term ones that it currently has on hand (~ 1 year). 
• In China, the 1,320MW Chongqing power plant construction is ahead of schedule, and the 1st unit’s COD is expected to be in 4Q16.

Maintain BUY 

• Marine continues to be a risk for the group, but we like the long-term growth prospects of the utilities segment which has exposure to developing markets. 
• At current levels, the utilities stub is trading at about 0.7x book, which we feel is unjustified for a division that has in the past five years (and also likely in the future) netted ROEs of between 14-22%. This is especially so considering the 
  1. less cyclical nature of the utilities industry, 
  2. its growing overseas segment, and 
  3. SCI’s proven ability to develop and execute large-scale greenfield projects. 
• Maintain BUY with S$3.07 fair value estimate.

Low Pei Han CFA OCBC Investment | http://www.ocbcresearch.com/ 2016-11-23

OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 3.070 Same 3.070