RHB Research 20160104: Sembcorp Industries (SCI SP) – Firing Up The Chinese Portfolio:
Sembcorp announced that it has formed a joint venture in Chongqing, China, to invest in a 1,620MW coal-fired power project. It now holds 49% of the JV, which has an operational 300MW plant and a 1,320MW plant which will commence operations by 1Q17. Maintain BUY with SGD3.80 TP. We believe that Sembcorp’s utilities business is under-appreciated by the market, trading at an implicit 0.75x P/BV. We wish management and investors a Happy New Year !
— The new assets. Sembcorp has injected CNY925m (c.SGD202m) of equity into ChongQing SongZao Sembcorp Electric Power for a 49% stake in the JV. The majority share is held in effect by the Chongqing Municipal Government. The new power plant, which utilises supercritical technology, is expected to be among the most efficient power plants in Chongqing. Its efficient technology, combined with ideal location next to its primary coal input and the impending reform of Chongqing’s power market to allow power generation suppliers to retail electricity directly to qualified power consumers should mean that these plants will enjoy a high proportion of generation uptime in the foreseeable future.
— A nearer-term asset this time. In contrast to Sembcorp’s previous power-plant contracts, which will only be completed in 2018 or later, this project has a shorter period to first cash flows. The 300MW power plant is already in operation and the 50%-complete 1,320MW power plant should begin contributions by 1Q17. The total investment value will be c.CNY6bn (c.SGD1.3bn), for which Sembcorp will finance its half by a combination of equity and on-shore long-term financing.
— Utilities business now trading at 0.75x P/B. Stripping out the SembMarine (SMM SP, Neutral, TP SGD1.81) market- and book-values, Sembcorp’s utilities business is trading at an implicit 0.75x P/B. In view of the many new overseas utilities contracts Sembcorp has been winning in recent months, we believe this underprice the long-term potential of the business. The Group itself trades at undemanding 0.96x FY15F P/BV, 8.0-9.4x FY15-17F P/Es, and EV/EBITDAs of 5.2x-7.1x. The 5.2% yield (implying a 43% payout ratio this year) should be sustainable and a key attraction to income investors. In addition, we would like to wish management and investors a Happy New Year!
Valumetrics Comments: We too felt that the utilities business of SCI is undervalued. The selloff seems to be only based on oil price and performance of SMM. People may forget that the utilities business provide a stable cash flow to SCI which in turns sustain its dividend for shareholders. Current 5.2% yield is attractive @ 43% payout ratio. Assuming no contribution of SMM, we believe SCI will still be able to sustain the dividend.
Valumetrics.co 
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