Sembcorp Industries: Upgrade after price correction
- 18% correction from peak
- Concerns well-flagged
- Upgrade on valuations
Share price has corrected 18% from peak
- Since our downgrade to Hold in early May, SCI’s stock price has corrected ~14% to settle near its 52-week low of S$3.87.
- This is also 18% from its recent peak.
- We believe that the main reasons for this weak share price performance was due to
- more downbeat guidance by management regarding the local power business, as well as
- later-than-expected earnings contribution of the Indian plant (TPCIL).
- Poor sentiment on SembMarine’s stock probably also weighed on its parent’s stock as well.
Not just the power business in Singapore
- We remain concerned about the challenging operating environment of the local power business, given the capacity expansion in the industry, but we also note that this segment accounted for only a fifth of the Singapore utilities net profit in FY14, with the rest coming from the natural gas, water and solid waste treatment and management segments.
- In total, Singapore utilities accounted for about half of total utilities in FY14, and the rest is from overseas assets.
- We still expect steady growth from the overseas business.
Undemanding valuations; look beyond current headwinds
- Though SCI is currently facing headwinds, we remain sanguine about longer term prospects, given the pipeline of projects in developing countries where utilities demand is expected to grow.
- We believe SCI’s proven track record in identifying, securing, financing and executing projects puts it in good stead for more to come.
- Currently, the stock is currently trading at ~9.4x forward P/E, (greater than 1 s.d. below its 5- year historical average) and 1.2x P/B, a historical low.
Upgrade to BUY; FV S$4.40
- We lower our P/E for the utilities business from 11x to 10x due to the dimmer outlook of the domestic power segment which remains competitive, and we are also cognizant of lower vesting levels that would affect earnings in this segment.
- These concerns have, however, been well-flagged by the market, and with the recent price correction, we now see a ~16% upside potential (includes 4.1% forecasted dividend yield) from our revised fair value estimate of S$4.40 (prev. S$4.72), we upgrade our rating to BUY.
(Low Pei Han)
Source: http://www.ocbcresearch.com/
