Sembcorp Industries - DBS Research 2018-01-22: Awaits Strategic Review

Sembcorp Industries - DBS Vickers 2018-01-22: Awaits Strategic Review SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries - Awaits Strategic Review

  • Riding on O&M recovery via Sembcorp Marine.
  • Awaiting announcement of strategic review outcome.
  • More collaboration between Sembcorp Industries and Sembcorp Marine, if stake is retained.
  • Reiterate BUY; Target Price lifted to S$4.50.

Maintain BUY; Target Price raised to S$4.50

  • Maintain BUY; Target Price raised to S$4.50, after raising our target price for Sembcorp Marine (SMM) from S$2.30 to S$3.10. 
  • While weakness in India may take longer to resolve, we continue to like Sembcorp Industries (SCI) as it offers a unique value proposition as a proxy to ride the cyclical O&M upturn, and is supported by a defensive utilities business. 
  • Our S$4.50 Target Price translates to 1.1x P/BV, which we believe is fair in view of its 6% ROE and 2% dividend yield. The stock offers 33% potential upside.

Strategic review gives rise to speculation. 

  • Under the helm of the new CEO, Sembcorp Industries has undertaken a complete review of its businesses and strategic direction, focusing on performance, sustainability, and value creation. The review was concluded in 4Q17 and management is finalising the action plans which shall be revealed in 1Q18. 
  • While premature to shed more light on the future direction of Sembcorp Industries, this may revive market speculation on potential rationalisation of Sembcorp Industries, Sembcorp Marine, and Keppel Corporation (Keppel). 
  • We also expect the review to focus on IPO of its mature assets, and expansion plans along the LNG value chain.

Where we differ: “Big three rationalisation theory” and long-term growth prospects of utilities. 

  • Since Aug-2015, we have flagged the potential of a merger between Keppel’s O&M arm and Sembcorp Marine in view of keener competition. The potential spin-off of its marine arm could re-rate Sembcorp Industries’s undervalued utilities business that is overshadowed by the cyclical marine business 
  • We believe in the long-term growth prospects of Sembcorp Industries’s utilities arm, which has expanded its global footprint and recently made forays into key emerging markets – India, Bangladesh and Myanmar.


  • Given its diverse earnings stream and various listed assets, we derive our fair value for Sembcorp Industries based on the sum of its different parts. 
  • For its holding company position, we applied a 10% conglomerate discount to the reappraised net asset value (RNAV). We derive a Target Price of S$4.50, 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.

WHAT’S NEW - Awaiting Strategic Review 

IPO of India assets. 

  • Listing of Sembcorp Industries’s mature assets with steady cash flow would help release capital for recycling and provide uplift to ROE. It has been reported in local media that Sembcorp Industries is considering IPO of its power plants in India. 
  • We believe it makes sense to IPO the first power plant, TPCIL, which is churning stable recurring profits backed by long-term PPA. The plant is expected to contribute c.S$60m to Sembcorp Industries’s net earnings. Assuming 12x PE, it could result in over S$100m or 6 Scts/share revaluation gain post listing.

LNG expansion plan: 

  • LNG, the more sustainable and greener source of energy, seems to be a good fit in view of Sembcorp Industries’s focus on performance, sustainability, and value creation. 
  • We expect more concrete expansion plans and possibly M&As such as gas terminal to be revealed.

More collaboration with Sembcorp Marine, if keeping marine within the group. 

  • We are a believer of Sembcorp Industries spinning off Sembcorp Marine to stay focused on its core competency in utilities. This could provide immediate uplift to utilities valuation which has been trading at an unwarranted 20-30% discount to book.
  • If management decides to keep the marine business and ride the recovery, we expect more collaboration between the two. For instance, Sembcorp Industries could place orders with Sembcorp Marine to build gas related vessels.
  • If the market talks of Sembcorp Marine potentially redeveloping its Admiralty Yard turns out to be true, Sembcorp Industries could offer its expertise in property development as well.

Pei Hwa HO DBS Vickers | http://www.dbsvickers.com/ 2018-01-22
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 4.50 Up 4.20