Sembcorp Industries - Implied utilities at trough book value

■ We think SCI's utilities business has been overly discounted. The market is valuing its utilities business at c.S$2.3bn or trough valuation of 0.6x P/BV.

■ We reduce our EPS by 3-7% to account for our recent earnings downgrades for SMM. Our SOP valuation also drops to S$3.85 accordingly.

Defying cyclicality
We forecast an average earnings growth of 14% for FY16-17 with the commissioning of the two power plants in India (TPCIL and NCCPP). This should plug the gap arising from SMM’s weakness given the challenging offshore & marine market. Its focus on emerging markets, which involve distressed water/power assets and encompasses Vietnam, the Middle East and China, has also paid off and these assets now contribute steady earnings (40% of utilities’ earnings).

More emerging market projects
The two power projects in Bangladesh (US$390m) and Myanmar (US$300m) mark SCI’s maiden foray into these new emerging markets, with more to come. We expect both projects to contribute c.S$25m in total to utilities profit by 2019. SCI’s success in executing greenfield projects sets it apart from international players which have mostly grown via M&As.

Lower utilisation for TPCIL in 4Q15 due to floods
The recent heavy rains and floods in South Indian cities could have disrupted the power generation activities of TPCIL, in our view. The average utilisation in Oct-early Dec dropped to c.70% from c.90% in 3Q15. Depending on how the weather pans out, TPCIL may not achieve breakeven by 4Q15 as it had previously guided. We have expected zero earnings contribution from India in FY15.

Retaining dividend
We believe SCI is likely to retain its dividend of S$0.16 for FY15 (interim DPS: S$0.05), backed by the divestment gain of S$350m from the sale of its stake in SembSita Pacific Australia. This translates into a 5% dividend yield. We expect to see more divestments of non-core businesses such as Shenzhen Chiwan Sembawang Engineering, Singapore Mint and Gallant Venture to ease working capital pressure stemming from SMM.

Technical Analysis
Daily Chart
Accounting for SMM
We maintain our Add call on SCI but we cut our FY15-17 EPS by 3-7% to incorporate our recent earnings downgrade for SMM. Our target price, still based on SOP, slides accordingly.

Key catalysts could come from
1) settlement of Sete Brasil issues for SMM,

2) rebound in oil prices, and

3) divestment of non-core assets.

We still see share price upside of c.13% in our SOP valuation if we apply a worse-case valuation for SMM, at 2 s.d. below its historical mean or 7.7x CY17 P/E (figure 4). (Read Report)

Read Related Reports
1) Sembcorp Industries - Value Emerging by DBS Group Research, published on 9 December 2015

2) Idea Of The Day - Sembcorp Industries by Lim & Tan Research, published on 9 December 2015

Source : CIMB Research

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