DBS on SCI
Riding on oil recovery
BUY SCI; TP lifted to S$3.10, after imputing higher valuation for SMM
(from S$1.15 to S$1.55). The risk premium for O&M players should
be reduced with the brighter oil outlook following OPEC’s agreement
to cut production. Sembcorp Industries (SCI) offers the best risk
reward among the three O&M large caps, trading at an undemanding
0.7x P/BV, implying a next-to-zero valuation for SMM. Our TP
translates to 0.9x P/BV, which is c.20% below the trough levels seen
during the Global Financial Crisis and Asian Financial Crisis. We
believe this is fair in view of its 6% ROE and 3% dividend yield.
Reiterate BUY on SCI.
TPCIL delivers encouraging earnings. Thermal Powertech Corporation
India (TPCIL) - SCI’s first Indian power plant which has been fully
operational since September 2015 - has turned from a loss position of
c.S$1m in 1H16 to c.S$7m profit in 3Q16. This follows the
resumption of operations after the plant had been shut down for
repairs in June. We expect more stable contribution of ~S$10m profit
a quarter with the commencement of long-term Power Purchase
Agreements (PPAs – 86% of total capacity) and resolution of technical
issues.
Emerging markets remain the growth engine. TPCIL is projected to
contribute c.5/10% of FY16/17F earnings from startup losses of
S$22.5m in FY15. This would help to mitigate the earnings decline
from Singapore power plants while other overseas utility businesses
are expected to be stable this year. Besides, SCI has also made forays
into other emerging markets - Bangladesh and Myanmar - and this
should underpin the longer-term growth prospects of its utilities
segment. However, the second Indian plant SembcorpGayatri Power
Ltd (SGPL) is coming on stream soon in 4Q16/1Q17 but long-term
PPAs with the government may only commence in 2018. This could
result in earnings volatility in the transitional year given the exposure
to short PPAs and spot market.
Valuation:
Given its diverse earnings stream and various listed assets, we derive
our fair value for SCI based on the sum of its different parts: market
valuations of its stakes in listed companies Sembcorp Marine (SGXlisted,
60.6% stake), Gallant Venture (SGX-listed, 11.96% stake) and
Salalah (Muscat stock exchange, 40% stake) and earnings from
utilities and urban development. For its holding company position, we
have applied a 10% conglomerate discount to the reappraised net
asset value (RNAV). We derive a TP of S$3.10, translating to 0.9x
P/BV.
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.
