SembCorp Industries - Buy: “Freedom to choose” is a positive


■ All electricity users in Singapore may be able to choose their supplier by 2018 opening up 25% of the market

■ This may create a level playing field for relatively small generators like SCI as service rather than installed capacity may drive market share in the segment

Retain Buy rating but cut price target to SGD4.8 from SGD5.0 and our 2016-17 estimates by 3-8% due to changes in our Sembcorp Marine estimates and price target

Singapore electricity market to be opened up fully by 2018:
Quoting the Minister for Trade and Industry S Iswaran, the Business Times 27th October 2015 reported that “Singapore’s electricity market will be fully liberalized in 2018, with all consumers including households being able to choose their own electricity retailers. Currently only customers consuming over 2MwH per month (called contestable customers) can choose their electricity supplier. From 2018, 1.3m more customers, mainly households, would be able to choose their own suppliers. Specific details of this plan are still being worked out.

Opens smaller consumers’ market for suppliers like SCI
Currently smaller customers mostly households (consisting of c25% of the market) are supplied electricity by six generation companies including SCI through distributor SP Services under a Vesting Contract with prices set every 3 months. Share of supply is based on the ratio of registered installed capacity as of 2001. SCI has a market share of less than 10% in this segment. The opening up of the market can potentially open up opportunities for SCI to increase its market share though SCI will have to invest to expand this business and the market may become less attractive than at present if this change leads to a fall in prices.

A level playing field and possible improvement in prices:
Some generators enjoy a greater market share in the vesting market contracts where prices are currently higher than the traded prices called Uniform Singapore Electricity Prices (USEP) - which determines the price for contestable customers. These generators can therefore afford to bid lower leading to a fall in USEP. There is a possibility that this “cross-subsidization” may reduce with the opening of the retail market. This could lead to an increase in USEP.

Technical Analysis
Daily Chart
We reiterate our Buy rating, cut TP to SGD4.8 due to changes in SMM’s valuation:
We value SCI at SGD4.80 (from SGD5.0) based on a sum of the parts valuation. We value the utilities division on a weighted average 2016 PE based on weighted average Country MSCI Utilities Indices currently at 11.3x. We value Sembcorp Marine (SMM SP, Price SGD 2.41, Buy) at SGD3.23 using DCF. We use a 10% conglomerate discount to arrive at our price target. (Read Report)

Source : HSBC Global Research

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