Sembcorp Industries (SCI) - DBS Research 2018-05-04: India Shining Brighter

SEMBCORP INDUSTRIES LTD SGX: U96

Sembcorp Industries (SCI SP) - India Shining Brighter

Sembcorp Industries (SCI) offers a unique value proposition as a proxy to ride the cyclical O&M upturn, and is supported by a defensive utilities business. SCI’s Utilities is undervalued at 0.6x PB and 7.4x PE against 6.5% ROE and is poised for a re-rating.
India operation sees signs of recovery and a potential IPO could also unlock value.

The power market in India is recovering with narrower oversupply in the market and higher tariff. This could swing the India operations to profit in 2018.
Sembcorp Energy India Limited (SEIL) operates 3,567MW power capacity comprising 2,640MW of thermal power and 927MW of renewable capacity as of end Dec-2017. It has been awarded an additional 800 MW of wind capacity since and management targets to grow renewable capacity in India by 300-500MW p.a.
The potential IPO of SEIL could realise revaluation gains of S$100- 200m, based on our ballpark estimate.

We believe in the long-term growth prospects of Sembcorp Industries’ utilities arm, which has expanded its global footprint and recently made forays into key emerging markets – India, Bangladesh, Vietnam and Myanmar.
While the marine spin-off did not happen in the 2017 strategy review, we hold on to our belief of a potential merger between Keppel’s O&M arm and Sembcorp Marine in view of keener competition in the sector. The potential spin-off of its marine arm could re-rate Sembcorp Industries’ undervalued utilities business that is overshadowed by the cyclical marine business.

Given its diverse earnings stream and various listed assets, we derive our fair value for Sembcorp Industries based on the sum of its different parts.
For its holding company position, we applied a 10% conglomerate discount to the reappraised net asset value (RNAV) to derive a Target Price of S$ 4.40, translating to 1.1x P/BV.

Key risks to earnings are further deferments/cancellations of marine projects, deterioration of Singapore's power spark spreads, and execution hiccups at its Indian power plants.

The 34% y-o-y earnings decline was due to lower marine and urban development earnings.
Utilities posted 27% y-o-y increase to S$70m attributable to higher earnings from China operations (+48% y-o-y or S$10.6m).
While 1Q18 profit only makes up 21% of our full year estimate, we expect marine and India earnings to improve in the quarters ahead. Hence, we are leaving our forecasts intact.

India operations reported net loss of c.S$16m in 1Q18 as a result of losses at its second thermal plant (SGPL, -S$25m) and renewable energy (SGI, -S$7m) during the low wind season (typically profitable during peak seasons in 2Q and 3Q), which more than offset the profit from first thermal plant (TPCIL, +S$15m). We expect the renewal of short term contracts for SGPL at higher rates to drive sequential improvement.
The power market in India is recovering with narrower oversupply (expected to go into supply deficit from 2020) and higher tariff. This could turn the India operations to profits in 2018. We keep our current estimate of a small loss of c.S$9m for India operations in 2018 for now.
Sembcorp Industries’ India power assets are held under Sembcorp Energy India Limited (SEIL), which operates 3,567MW power capacity comprising 2,640MW of thermal power (TPCIL and SGPL) and 927MW of renewable capacity as of end Dec-2017. It has been awarded additional 800 MW wind capacity recently and management targets to grow the renewable capacity in India by 300-500MW pa.
The potential IPO of SEIL could realise revaluation gains of S$100-200m, based on our ballpark estimate. A draft red herring prospectus has been filed with the Securities and Exchange Board of India.
Given the usual 6-9 months’ timeline, if successful, the IPO could take place in 4Q18. Post-IPO, Sembcorp Industries will continue to hold a controlling stake, which we believe would be 60-65%.

Marine subsidiary, Sembcorp Marine reported ~S$5m profit (Sembcorp Industries’ interest is ~S$2m) in 1Q18. Excluding new accounting effect, it would have reported net loss of S$33m. We expect sequential improvement towards 2H18 with higher contract wins translating to higher activity level.

Urban Development recorded profit of S$9.6m in 1Q18, mainly from industrial land sales from Vietnam. This represented 75% y-o-y decline as profit in 1Q17 was boosted by commercial and residential land sales recognised form Nanjing, China.
In addition, land sales tend to be lumpy by nature.

Pei Hwa HO DBS Vickers | https://www.dbsvickers.com/ 2018-05-04

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