Sembcorp Industries - Valuations Attractive After SembMarine Hits Lows


Sembcorp announced that it has signed a USD300m contract to build, operate and transfer what would be the largest gas-fired independent power plant in Myanmar. The stock has fallen 13% since 30 Oct, dragged down by the underperforming SembMarine, which fell 26%. As we believe SembMarine has reached sufficiently low levels, we upgrade Sembcorp to BUY on valuation grounds, with TP tweaked to SGD3.80 (from SGD3.90).

Project structure
The build-operate-transfer (BOT) structure will see Sembcorp Industries (Sembcorp) owning 80% of the 225-megawatt power plant in central Myanmar, with its partner MMID Utilities holding 20%. It is expected to be completed in 2018, and will supply power to the Myanma Electric Power Enterprise under a 22-year power purchase agreement.

Keeping with strategy of targeting developing countries with an eye on synergies
As this will be the largest, newest and most efficient plant in a country with a “severe power deficit”, we expect the plant to run near full capacity on start-up. In its statement, the company also sees this as “a foothold to potentially develop other businesses in the country, such as water and urban development”.

SembMarine upgraded to NEUTRAL on unprecedented valuation lows
We upgraded SembMarine (SMM SP, NEUTRAL, TP: SGD1.81) to NEUTRAL after its P/BV fell to 1.38x, well beyond the 2008 low of 1.9x. These are historical lows (see Figure 2). After falling 26% in less than two months, we believe that most of the negatives have been factored into its price. In that upgrade note, we stated that if two Brazilian drillships were canceled, our TP could fall by 34%, which would lower our TP for Sembcorp to SGD3.40 if it came to pass – which still offers a significant upside to today’s level.

Technical Analysis
Daily Chart
Utilities business appears underpriced
Even with a lower SGD1.81 TP for SembMarine, our SOP valuation for Sembcorp still works out to SGD3.80, implying that its utilities business is underpriced. With a 9.5x FY15F P/E, <1x P/BV, and 5.2% yield, the stock now looks attractive again. Upgrade to BUY with a SGD3.80 TP based on SOP. (Read Report)

Source : RHB Research

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