Sembcorp Industries - OCBC Investment 2017-11-21: Upgrade With Price Correction

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SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries - Upgrade With Price Correction

• India IPO looks likely but timing uncertain.
• Strategic review in final stages.
• Upgrade to BUY.

Looking back at 2017 

• 2017 has been an eventful year for Sembcorp Industries. In the utilities segment, several assets commenced operations including the 1,320 MW power plant in Chongqing, but the focus this year has mostly been on India –
  1. In Mar, Sembcorp Industries increased its stake in its India renewable energy business to 70.38%,
  2. In Apr, it won an Indian wind power project with close to 250MW capacity,
  3. In May, Sembcorp Industries was awarded master development rights to the Andhra Pradesh Amaravati City start-up area,
  4. In Aug, Sembcorp Industries said it will increase its stake in its Indian renewable energy business to 100%,
  5. In mid Nov, Sembcorp Industries was the winning bidder again in India’s second wind power auction. 
• Marine started securing significant new orders in 3Q17, and we are hopeful of more to come. As for urban development, the segment has delivered a solid performance this year and its pipeline continues to look healthy.

2018 could see a different SCI 

• With the group’s moves in India, it is not surprising if Sembcorp Industries were to undertake an IPO of its Indian business. An Oct report by India’s LiveMint mentioned that Sembcorp Industries is preparing to list its Indian unit, which consists of thermal and renewable power assets. However, the greater focus will still be on the results of the strategic review, which should be known by the end of this year. 
• There has been speculation of a potential privatization or divestment of the marine business, as well as possible divestments of non-core assets and utilities assets in more mature markets to invest in marine or other emerging market utilities assets. 
• Another possible investment that has been speculated on is the LNG business in Singapore, with its bright future prospects and Sembcorp Industries' natural fit for this business, given its relevant expertise and established track record. 
• Ever since our downgrade to Hold on 3 Nov, Sembcorp Industries’ share price has corrected 10% compared to the STI’s flattish performance. Given the greater upside potential for the stock post correction, we upgrade our rating to BUY with an unchanged fair value estimate of S$3.59.

Low Pei Han CFA OCBC Investment | http://www.ocbcresearch.com/ 2017-11-21

OCBC Investment SGX Stock Analyst Report BUY Upgrade HOLD 3.590 Same 3.590