Sembcorp Industries - OCBC Investment 2018-03-05: On The Prowl For Assets

SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries - On The Prowl For Assets

According to media reports, Sembcorp Industries (SCI) has indicated interest in buying clean energy producer Orange Renewable from Singapore-based AT Capital Group. Sembcorp Industries would be at least the third firm to show interest in Orange’s portfolio, after Hero Future Energies and Greenko Group.
Orange Renewable currently has 567.2 MW of operating wind capacity with over 2250 MW under development in various states across India.
Though India’s green energy tariffs are currently low and it is unclear when there might be a recovery, we think it makes sense for Sembcorp Industries to acquire renewable assets now to build up its portfolio considering it is a long-term player in the energy market. This is in line with its strategy to double its renewables portfolio to approx. 4,000 MW by 2022, especially since the world is rapidly transitioning to a low-carbon economy.

At the recent results briefing, management also committed to achieve double-digit ROE in five years, based on underlying profit (i.e. not distorted by asset disposals). In our view, there are three potential ways to achieve this:
1. recovery of India utilities operations (more specifically SGPL), which is possible as management is seeing some tightening in the market,
2. new order flows from marine, and
3. greater returns from a revamped utilities business (there will be multiple energy offerings built around anchor assets).
An example of a new income stream is the start of a fuels trading business (asset-backed and not purely speculative), as Sembcorp Industries may be able to arbitrage between LNG and piped natural gas, being both a gas buyer and gas user (in power and steam).

Looking ahead, the utilities business will focus on growing three business lines: Gas & Power, Renewables & Environment, and Merchant & Retail.
Sembcorp Industries has also recently reaffirmed its commitment to the marine business for the long term. As we have lowered our Fair Value for Sembcorp Marine (see report: Sembcorp Marine - Awaiting New Orders), our Fair Value for Sembcorp Industries also drops from S$3.84 to S$3.59.

Low Pei Han CFA OCBC Investment | http://www.iocbc.com/ 2018-03-05

OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 3.59 Down 3.840