not vested
Sembcorp's expanded but undervalued utilities business an attraction By Benjamin Cher
SINGAPORE (Sept 29): DBS Group Research is reiterating its “buy” call on Sembcorp Industries with a target price of $3.10, citing the group’s
undervalued utilities business although it has expanded regionally.
In a Wednesday report, analyst Ho Pei Hwa notes that Sembcorp is
trading close to book value that comprises largely its utilities business. This also implies investors would be
getting SembMarine shares for almost “free.”Sembcorp’s first power plant in Indian, Thermal Powertech Corporation India which is expected to make about $10 million in earnings per quarter, made a small loss of under $1 million in 1H16 due to repairs and maintenance requiring shutdown, notes Ho.
However, the operation should turn profitable should capacity be ramped up to 86% as it has been contracted on long-term power purchase agreements since April, with the loss in 2Q16 being made up in 2H16.
Sembcorp’s expansion into emerging markets has helped mitigate the overcapacity and declining earnings from the Singapore power market, highlights Ho.
This means the Indian power plants will be key in driving earnings over the next two years. The company’s second Indian power plant, Sembcorp Gayatri Power is expected to start operations next year but with the spot market volatile; Ho notes that there is uncertainty on the profitability of the second plant.
In China, Sembcorp will also hand back the 2,300MW coal-fired power plant to the Chinese government in Oct. Operated by Yangcheng International Power Generating, the plant contributes 40% of Sembcorp’s net profits from China. Ho says the loss could be mitigated by the new 1,600MW power plant and water facility coming online in China next year.
Meanwhile, Myanmar and Bangladesh are expected to help drive medium-term growth according to Ho, as power plants in these countries are expected to come online in 2018 with long-term power purchasing agreements already signed.
“This should underpin the longer-term growth prospects of its utilities segment,” says Ho.
There are key risks for Sembcorp though. Competition in Singapore’s power market is rising and issues with oversupply and over-commitment of gas supply are likely to plague the market for the medium to long term ,Ho notes.
The Indian power plants too pose another potential key risk, with the availability of coal supply and power purchase agreements a concern.
Shares of Sembcorp Industries closed 2.8% higher at $2.60.
Source: The Edge
http://smr.theedgemarkets.com/article/s ... c-87358173
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