Sembcorp Industries - DBS Research 2020-06-01: MSCI Rebalancing Sell-Off A Buying Opportunity


Sembcorp Industries - MSCI Rebalancing Sell-Off A Buying Opportunity

  • Sell-off triggered by MSCI Singapore Index rebalancing creates a window of opportunity.
  • Sembcorp Marine (SGX:S51) cash call risk is priced in.
  • Compelling valuation with 28% potential total returns.
  • Too cheap to ignore. Upgrade to BUY; Target Price unchanged at S$1.70.

Sharp correction due to MSCI rebalancing; unwarranted low valuation of 0.34x P/BV.

  • Sembcorp Industries' share price corrected nearly 10% in a day, following MSCI Index rebalancing that took place last Fri. It is now trading at an unwarranted low valuation of 0.34x FY20 P/BV with 61%-owned Sembcorp Marine (~26% of Sembcorp Industries (SGX:U96)’s valuation) trading at 0.66x P/BV while non-marine businesses are at an implied 0.29x P/BV.
  • Upgrade to BUY with 25% potential upside to unchanged Target Price of S$ 1.70.

Sembcorp Industries’s earnings expected to remain in positive territory with mid-single digit ROE.

  • While Sembcorp Marine’s ROE has deteriorated from a peak of > 30% before GFC to being loss-making in recent years, the non-marine business should continue to deliver steady ROE at around the mid-to-high single digits.
  • Our current SOTP target price of S$1.70 (implies an undemanding 0.5x P/BV), takes into account Sembcorp Marine’s Target Price of S$0.72/share (0.7x P/BV) and 0.4x P/BV for its non-marine businesses.

Non-marine segments have been overshadowed by exposure to the cyclical marine sector.

  • We believe there is room for upward revision in non-marine’s valuation multiple to 0.6- 0.7x P/BV as operating environment in India, the UK and Singapore improves, partially offset by some downside risks to Sembcorp Marine as order wins momentum could be slower than expected amid global capex cut.
  • BVPS for Sembcorp Industries is estimated to be S$3.97 for FY20, of which c.18% or S$0.72 is from the marine business, while energy & urban businesses form the remaining 82% or S$3.25.

Cash call risk for Sembcorp Marine is priced in.

  • Current share price of S$1.36 implies 0.4x P/BV for the non-marine business, and nearly zero value for Sembcorp Marine. In fact, one could argue that investors have factored in a negative equity value for Sembcorp Marine, and hence dragging the non-marine segment to such a depressed valuation.

Restructuring plan remains a wild card.

Others concerns that aggravated recent share price weakness:

COVID-19 impact:

  • Operationally, Energy segment, comprising mainly power and water treatment, is relatively more resilient, mostly backed by long-term contracts. However, the reduction in economic activity due to lockdowns in multiple markets have affected its merchant operations has led to lower energy demand (by 10-25% y-o-y in Apr-2020) and lower prices particularly in Singapore, India, and the UK.
  • Meanwhile Urban segment is expected to provide steady core profits in 2020 despite the near-term slowdown, underpinned by its orderbook. The pace of land and property sales for the Urban business has been affected by the COVID-19 pandemic. The uncertain economic outlook could also lead to lower take-up and demand, or delayed launches for some of the integrated developments and properties.

One-off items in upcoming results.

Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2020-06-01
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