SembCorp Ind - Earnings sensitivity from possible Salalah contract

In a recent BT article, it was mentioned that SCI is discussing with banks about closing the financing for the US$1bn-plus Salalah independent water and power project (IWPP) in Oman, suggesting that the group is likely to complete the deal to build, own and operate the IWPP by year-end. This runs counter to earlier reports which suggested that Oman would call for project re-bids. The article also indicated that the group had recently signed a letter with the Omanis which guarantees they would not engage any other party during a 'standstill' period. The Omanis are looking for early completion of the Salalah IWPP, which comprises a 400 MW power station and a de-salination plant to produce 15m gallons of water a day, as demand for resources in the sultanate is growing fast. While our discussion with SCI did not yield much new information as the potential contract is currently in a sensitive stage, a simple analysis suggests that depending on the level of financing obtained, earnings accretion required by the group in four years time (i.e. FY2013) could range between S$29m and S$58m in order to achieve an assumed equity IRR (EIRR) of 13% which is similar to the Fujairah project. These, we think, may be factored into their analyses as SCI works to determine the adjusted tariffs with the Omani government. Our study assumes two years of construction time for this US$1bn greenfield project, one year to ramp up operations, and 23 years for the O&M contract. If an 8.3% cost of equity (rf 2.6%, rp 4.8%, and beta 1.192) is used, the NPV for the potential stream of earnings could range between S$127m and S$255m (or S$0.07/sh and S$0.14/sh, respectively).

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