SEMBCORP INDUSTRIES LTD
U96.SI
Sembcorp Industries - Positioning For The Future
- Maintain BUY; Target Price adjusted to S$4.10, following the upgrade in Sembcorp Marine (SMM)’s Target Price to S$2.30.
- Sembcorp Industries (SCI) offers a unique value proposition, as a proxy to ride the cyclical O&M upturn and possessing a defensive utilities business.
- Our Target Price translates to 1.1x P/BV, implying a 29% upside to the current share price of Sembcorp Industries. We believe this is fair in view of its 6% ROE and 2% dividend yield.
Strategic review gives rise to speculation.
- Under the helm of the new CEO, SCI will be undertaking a complete review of its businesses and strategic direction, focusing on performance, sustainability and value creation. The outcome of the review is expected to be revealed and implemented in six months’ time.
- While it is premature to shed more light on the future direction of SCI, it might revive market speculation on potential rationalisation of the three home-grown industrial plays, namely SCI, Sembcorp Marine (SMM) and Keppel Corporation (Keppel).
Where we differ: “Big three rationalisation theory” and long-term growth prospects of utilities.
- Since Aug-2015, we have flagged the potential merger between Keppel’s O&M arm and SMM during the structural downturn. The spin-off of its marine arm could re-rate SCI’s undervalued utilities business that is currently overshadowed by the weak marine outlook.
- We believe in the long-term growth prospects of SCI’s utilities arm, which has expanded its global footprint and recently made forays into key emerging markets – India, Bangladesh and Myanmar.
Valuation
- Given its diverse earnings stream and various listed assets, we derive our fair value for SCI based on the sum of its different parts: market valuations of its stakes in listed companies Sembcorp Marine (SGX-listed, 60.6% stake), Gallant Venture (SGX-listed, 11.96% stake) and Salalah (Muscat stock exchange, 40% stake) as well as earnings from utilities and urban development.
- For its holding company position, we have applied a 10% conglomerate discount to the re-appraised net asset value (RNAV). We derive a Target Price of S$4.10, translating to 1.1x P/BV.
Key Risks to Our View
- Key risks to earnings are further deferments/cancellations of marine projects, deterioration of Singapore's power spark spreads, and execution hiccups at its Indian power plants.
Pei Hwa HO
DBS Vickers
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http://www.dbsvickers.com/
2017-07-21
DBS Vickers
SGX Stock
Analyst Report
4.10
Up
3.800
