Sembcorp Industries’ utilities business to grow 8% in FY12

Essential Utilities
One needs water and power, even during a recession. SCI’s Utilities business could provide some protection against downside at Marine. At current implied market cap for Utilities (S$1.4bn), investors are only paying for existing assets on Jurong Island; the rest is free. Our takeaway from a recent SCI non-deal roadshow was the high likelihood that SCI Utilities could emerge from a recession unscathed.

We still sense growth, thanks to long-term contracts and the unabated demand for power and water.

Utilities still growing
Despite threats of a recession, we are still forecasting 8% earnings growth for Utilities in FY12, backed by strong power spreads in Singapore and capacity expansion at Salalah, Oman’s independent water and power plant. Operations in Vietnam, China and UK should be stable over the next 12-18 months as offtake is unlikely to be compromised.

Financing secured for capacity expansion
There are no risks to financing or delay risks for new projects under construction. All financing facilities have been drawn down to support SCI’s vision to double its installed global power and water capacity to 10,000 MW and 10m cubic metres/day respectively. First in the pipeline is Salalah IWPP (Phase 2), which should come on stream smoothly by 2Q12, adding 10% of power to existing 3,855MW capacity.

Earnings upside could further come from an additional 86m cubic feet daily of gas to be piped in by Sembgas in Oct 11 from West Natuna, boosting its gas capacity by 26%.

Valid concerns on Marine
Investors were concerned about a major slowdown in order intake by SMM and over Petrobras tenders.

Management was reticent on the outlook but reiterated that enquiries remained firm and there have been no signs of credit tightening, though spreads could be higher in a recession.

Cheapest conglomerate
At 7.5x CY12 P/E, the market appears to be pricing in a 10% earnings decline at SMM. SCI is the cheapest Singapore conglomerate at trough valuations of 1.4x P/BV, or 2008-09 lows.