Sembcorp Industries - CIMB Research 2018-02-24: Strategic Review ~ Riding Out Cycles

SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries - Strategic Review ~ Riding Out Cycles

We hosted Sembcorp Industries’ post-4Q17 results/strategic review with Singapore investors.
Double-digit ROE target in the next five years will be derived mainly from utilities by getting India right via acquisitions and development of its existing business.
Investors focused on
1. Sembcorp Industries’ stake in Sembcorp Marine,
2. India’s market outlook
3. Sembcorp Industries’ majority stake in India assets post IPO,
4. group debt position and
5. LNG assets.
We think the decision to keep Sembcorp Marine within the group may have disappointed investors.

Key catalyst is the valuation of India assets’ IPO. Risks are extended India losses.
Maintain ADD with a higher SOP-based Target Price of S$4.13 due to a higher Sembcorp Marine Target Price.

Management reiterated its commitment to ride out the cycle to support Sembcorp Marine as it remains a long-term investment as the industry is at an inflection point. Management believes double-digit ROE for Sembcorp Marine is doable in the long-term. Management also sees synergy between Sembcorp Marine and utilities, especially in offshore wind farms and questioned the need to divest the division at the bottom of the cycle.
Sembcorp Marine is trading at below-historical average valuations of < 2.5x P/BV.

Management expects India to be profitable in FY18 and sees the market improving by FY19. In contrast to our previous expectations, Sembcorp Industries will keep a majority stake in India post-IPO. There is no intention to exit the market given the steady recurring income for TPCIL and expansion for SGI renewables capacity.
We expect losses for SGPL to narrow from S$107m in FY17 to S$76m in FY18 due to interest cost savings. Significant improvement in merchant market tariff could surprise on the upside.

One of the outcomes of the strategic review is the plan to double renewable capacity from 2,000MW currently to 4,000MW by 2022. New areas of focus include Australia, UK and Southeast Asia. Based on a general guideline of S$1m/MW, total cost would be S$2bn (funded internally, cash call unlikely).
De-carbonisation is a structural trend and Sembcorp Industries expects to invest less in thermal power and more in gas and renewables, generating more green credit while solving the intermittency problem of supply disruption for renewables.

Sembcorp Industries has set a systematic capital recycling plan, including unlocking up to S$500m of peripherals utilities business in the next two years. This includes the divestment of its 73.4% stake in South Africa’s Sembcorp Siza Water (municipal water and sanitation services) at c.S$89m by 1H18.
We believe more municipal water assets in the Americas could be targets for divestment. Management also noted that proceeds from the Indian IPO may not be used to repay debt but instead reinvested for growth.
New growth strategy for utilities may take time to kick in We think other new growth areas that will take time to kick in include
1. power retail market and digitalisation,
2. deepening of its presence in the LNG segment via trading/arbitrage/new markets.
There is no need to acquire LNG assets (read: not buying SLNG at current price) as long as Sembcorp Industries has access to gas.

Our EPS is revised to incorporate lower Sembcorp Marine numbers, higher urban development and India’s recovery in FY19. Our SOP Target Price is also higher on a revised Target Price for Sembcorp Marine and changes in higher WACC and capex for utilities.
We estimate the listing of its Indian to fetch equity value of S$1bn-2.3bn, 8-10x EV/EBITDA (see report Sembcorp Industries: Detaching India).

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2018-02-24

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