SINGAPORE (June 29): UOB Kay Hian is upgrading Sembcorp Industries (SCI) to “buy” from “hold” on limited downside and an improving outlook in India.
The research house is keeping its target price of $3.60 unchanged, valuing the non-marine business at 8.4 times FY19 earnings.
In a Friday report, lead analyst Foo Zhi Wei notes that current valuations imply the non-marine unit to be trading at 6 times earnings, which is below its long-term forward mean P/E of 8 times to indicate the emergence of value.
With India’s merchant power prices on the rise, he sees sizeable capacity available for SCI to benefit from higher steam turbines power purchase agreements (ST PPA) prices or spot prices, considering how only 38% of Sembcorp Gayatri Power’s (SGPL) capacity contracted at low tariff prices.
The way Foo sees it, SGPL is expected to see smaller losses as it enters into new short-term ST PPAs at the higher prices.
“Given the strong 2Q18 performance thus far, as well as higher spot electricity price exposure, losses at SGPL are expected to narrow. However, partially offsetting this improvement is the weak performance from Sembcorp Energy India (SEIL), which suffered from 8-9 days of outages in May. Overall, a net y-o-y improvement is to be expected,” comments the analyst.
Going forward, he believes the improving industry outlook will help assuage potential investors’ fears of SCI’s India IPO, which remains on track for listing in 2H18.
“Local media had on 13 June reported a delay in the IPO launch to 2QFY19 (3QCY18), citing investor concerns over the general macroeconomic environment as well as pricing. If true, the revised date remains within expectations for a 2H18 listing, though the investor concerns pose a concern,” adds Foo.
As at 2.50pm, shares in SCI are trading 1 cent higher at $2.76 or 10.8 times FY19F P/E.
