Sembcorp Industries - OCBC Investment 2017-01-11: Well-positioned to grow

Sembcorp Industries - OCBC Investment 2017-01-11: Well-positioned to grow SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries - Well-positioned to grow

  • Good project pipeline.
  • Capturing emerging market growth.
  • Liberalisation of local electricity market.

Targeting more overseas growth… 

  • 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.

… amid overcapacity in Singapore 

  • In Singapore, however, the group has been facing more competition due to an overcapacity issue in the power generation market. 
  • Looking ahead, there will be full liberalisation of the retail electricity market (this is separate from the wholesale market). SCI’s genco is not in the top 3 in terms of generation capacity, and we expect that this impending development would level the playing field for industry players, and that the impact may be greater for the top 3 gencos.
  • More expenses would also be incurred on marketing on SCI’s part.

Tweak SOTP valuation; higher FV of S$3.36 

  • 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. 
  • We have updated our SOTP valuation to incorporate our higher FV for the marine division, and tweaked our estimates for the utilities segment. As such, our FV for SCI rises to S$3.36. 
  • At current levels, the utilities stub is trading at about 0.75x 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.

Low Pei Han CFA OCBC Investment | 2017-01-11
OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 3.36 Up 3.070