Sembcorp Industries - DBS Research 2019-02-22: India Success Remains The Key


Sembcorp Industries - India Success Remains The Key

  • Sembcorp Industries’ 4Q18 results boosted by non-recurring items. 
  • India’s SGPL power plant to supply 500MW of power to Andhra Pradesh for 8 years. 
  • Marine is seeing uptick in enquiries. 
  • Reiterate BUY; Target Price lifted to S$3.90. 

Maintain BUY; Target Price raised slightly to S$3.90 as we roll over the valuation to FY19.

  • SEMBCORP INDUSTRIES LTD (SGX:U96) offers a unique value proposition as a proxy to ride the cyclical O&M upturn, while supported by a defensive utilities business.
  • Sembcorp Gayatri Power Limited's (SGPL) losses should narrow as Bangladesh PPA (19% of capacity) is set to commence by end Feb-2019 and the second long-term PPA (38% of capacity) could kick-in after regulatory clearance in the next few months. We believe continuous improvement in India will re-rate Sembcorp Industries’ Utilities business, which is undervalued at 0.6x P/BV and 6x PE against 6-7% ROE.

India power segment on recovery path; remains long-term growth engine.

  • Sembcorp Industries’ India operations swung to a profit of S$47m in 2018, from loss of S$58m a year ago and the positive trend should continue. The power market in India is recovering with current peak surplus expected to reverse by FY2020 according to independent research house CRISIL, driving up tariffs.
  • India remains a key growth driver, accounting for 15- 20% of earnings.

Where We Differ:

  • 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 LTD (SGX:S51) 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 being 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$3.90, translating into 1x P/BV. See attached PDF report for SOTP valuation details.. 

Key Risks to Our View:

  • 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.

WHAT’S NEW - Decent 4Q18

4Q18 boosted by non-recurring gains.

  • Sembcorp Industries reported decent 4Q18 results with headline net profit of S$106m, vs our expectation of ~S$70m.
  • Utilities income was boosted by non-recurring gains:
    1. Divestment gains from disposal of an associated company in Wuxi (S$18m);
    2. India O&M settlement (S$9m);
    3. Gain from SEIL merger (S$17m).

Steady Utilities performance.

  • Utilities segment’s earnings achieved ~23% y-o-y growth (excluding one-offs) to S$321m in FY18, driven by improvement in India operations, which reversed from a loss of S$58m to profit of S$47m. The uptrend is expected to continue into 2019 with a narrower surplus in India, commencement of long-term PPA for the second plant and resumption of first plant’s 50% capacity that was affected by boiler issues.
  • Losses at the second power plant in India (held under SGPL) should narrow as the long term PPA to supply 250MW power to Bangladesh (~19% of capacity) commences in end Feb.
  • The second long-term PPA to supply 500MW of power to Andhra Pradesh for 8 years could also kick in soon after regulatory clearance.
  • In the case of the first power plant in India (held under SEIL) half of the capacity which was affected by boiler issues since Oct-2018 should resume operations soon. There will also be compensation for loss of income during the partial shutdown period which could be received by end of 2019.
  • In Singapore, the power market remains very competitive. The Open Electricity Market will be extended nationwide by May- 2019. On carbon tax, we estimated that the implementation could result in additional cost of S$15-20m, of which a big chunk could be passed on to customers.

Urban development

  • Urban development segment generated record profit of S$86m (+4% y-o-y) in FY18, with strong contributions from Vietnam and China. A record net orderbook of 425 ha will be recognised as land sales over next 2-3 years.
  • In addition, we will also see recognition of income from the sale of Riverside Grandeur Residential development in China as progressive handover is expected to take place in 2019.


  • Marine subsidiary – 61% owned Sembcorp Marine (SGX:S51) - surprised market with a S$5.9m (Sembcorp Industries’ share S$3.6m) headline profit in 4Q18, vs expectation of a loss of S$20-30m (Sembcorp Industries’ share S$12-15m). As a result, Marine segment reported a smaller than expected net loss of S$48m in FY18.
  • While overall improvement and offshore capex will take time to translate to new orders, management is hopeful that the higher enquiries level and tendering would translate to higher contract wins and thus be positive to both topline and bottomline.

Final dividend

Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2019-02-22
SGX Stock Analyst Report BUY MAINTAIN BUY 3.90 UP 3.700