Sembcorp Industries: Share price has corrected 18% from peak and main reasons were due to 1) more downbeat guidance by management regarding the local power business and 2) later-than-expected earnings contribution of the Indian plant. Poor sentiment on SembMarine’s stock probably also weighed on its parent’s stock as well.
Local power business only accounts for a fifth of Singapore utilities net profit in FY14, with the rest coming from natural gas, water and solid waste treatment and management segments. In total, SG utilities accounted for 50% of total utilities in FY14, with the rest coming from overseas assets.
Currently, stock is trading at 9.4x forward P/E and 1.2x P/B, a historical low. Though SCI is facing headwinds, OCBC remains optimistic about longer term prospects, given the pipeline of projects in developing countries where utilities demand is expected to grow.
The house upgrades their rating to BUY with a revised TP: $4.40 (prev. $4.72) as they see a 16% upside potential that includes 4.1% forecasted dividend yield. P/E for utilities business is lowered from 11x to 10x due to dimmer outlook of domestic power segment which remains competitive.
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