Sembcorp Industries - CIMB Research 2018-02-20: Detaching India?

SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries - Detaching India?

Sembcorp Industries (SCI) is streamlining its Indian operations under Sembcorp Energy India Limited (SEIL) for greater synergy.
This could be a precursor for the listing of its Indian assets. Pegging to Indian power peers (8-10x 12M forward EV/EBITDA), we estimate SEIL to be worth S$1bn-2.3bn.
We believe Sembcorp Industries is likely to retain c.40% stake on the Indian assets having spent years developing the market.
We expect the above to be announced at the company's full-year results briefing on Friday morning, 23 Feb, together with update on its ongoing strategic review.
Maintain ADD and SOP-based target price of S$3.87.

Yesterday, Sembcorp Industries announced the reorganisation of its India energy operations to a more streamlined shareholding structure and for greater synergy. The reorganisation will combine its thermal and renewable energy businesses into one entity.
The reorganisation comprised:
1. transfer of Sembcorp Industries's 88% stake in Sembcorp Gayatri Power (SGPL) to Thermal Powertech Corporation India (TPCIL), now known as Sembcorp Energy India Limited (SEIL);
2. transfer of 12% stake in TPCIL from Sembcorp Industries’s partner Gayatri Energy Ventures to SEIL; and
3. transfer of Sembcorp Industries's entire 71.6% stake in SGI to SEIL.

We think the reorganisation is a precursor to a listing of its Indian assets. Indian media has reported the potential listing of Sembcorp Industries’s India operations, which could see the company raising as much as SS$500m-600m (Rs3,200-3,800 crore).
Benchmarking to Indian peers that are trading at c.8-10x 12M forward EV/EBITDA, we estimate equity value of SEIL at c.S$1bn to S$2.3bn. We believe Sembcorp Industries is likely to retain c.40% stake in SEIL having spent years developing the market.

If Sembcorp Industries's Indian operations is detached, we estimate its net gearing will reduce to 0.6x, from 1.1x currently as it carried c.S$3.6bn of debt as of 9M17. Sembcorp Industries’s earnings could also be boosted as interest costs for Indian assets are at about S$400m p.a.
Together with Sembcorp Marine’s receipt from Borr Drilling (US$500m) for the sale of nine jack-up rigs and US$385m for the sale of semi-submersible rig, Westi Rigel, net gearing could further improve to 0.3x, in our estimate.

The market expects some corporate exercise on Sembcorp Industries’s stake in Sembcorp Marine post the former's strategic review. We reiterate a few options:-
1. Privatisation of Sembcorp Marine. We are not in favour of this as it will negate the streamlining of its Indian assets. It may not extract the best shareholders' value at c.2.1x 2018F P/BV.
2. Outright divestment. This could unlock S$3.4bn of cash for its 61% stake, although it would then forego the potential upcycle of order recovery. Together with the listing of Indian operations, Sembcorp Industries would be in a net cash position. This would free up capital for investment in other utilities assets.
3. Dividend in specie. We see this as mildly positive with the deconsolidation of Sembcorp Marine’s debt.
4. Reducing stake in Sembcorp Marine to below 50%. Again, we think this would be mildly positive with the deconsolidation of debt and the potential of riding the upcycle. However, this would mean the Sembcorp Industries will still be seen as a non-pure play in utilities.

We see clarity of strategic review as a key catalyst for the stock.
Downside risk could come prolonged strategic review that stretches beyond 1Q18F.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2018-02-20

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