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Sembcorp Industries - Phillip Securities 2020-09-09: Charting A New Course

SEMBCORP INDUSTRIES LTD (SGX:U96) | SGinvestors.io SEMBCORP INDUSTRIES LTD (SGX:U96)

Sembcorp Industries - Charting A New Course

  • Sembcorp Industries shareholders could realise a total of $2.72 per share.
  • IPO of Sembcorp Energy India Limited (SEIL) to crystalise value of Sembcorp Industries’s India business unit, which we estimate to have a value of about about INR98bn or S$1.8bn.
  • Potential positive re-rating of Sembcorp Industries following the demerger as profitability and return on equity improves in FY21e.
  • Initiate with a BUY recommendation and a target price of $2.72.



Sembcorp Industries - Company Background

  • A merger of Sembawang Corp and Singapore Technologies Industrial Corp in 1998 resulted in the formation of Sembcorp Industries (SGX:U96), with businesses spanning a wide range of industries such as Infrastructure, Marine Engineering and Information technology. Sembcorp Industries is now a more focused company.
  • Sembcorp Industries is a leading energy and urban development group, operating across multiple markets worldwide. They have three main business arms, energy, marine and urban.
  • On the 8 June 2020, Sembcorp Industries and Sembcorp Marine (SGX:S51) announced the deconsolidation of their respective businesses. Sembcorp Marine provides innovative engineering solutions in the global offshore, marine and energy industries. Headquartered in Singapore, the Sembcorp Marine Group has close to 60 years of track record in the design and construction of rigs, floaters, offshore platforms and specialised vessels, as well as in the repair, upgrading and conversion of different ship types. Its solutions focus on the following areas: Gas value chain, renewable energy, process, advance drilling rigs, ocean living and maritime security.
  • As a diversified energy and urban player, Sembcorp Industries is uniquely positioned to provide integrated solutions to meet their stakeholders’ needs. Leveraging technology and digital innovation, the draw on their deep understanding across their business and global track record to provide a suite of integrated energy and urban solutions that support the energy transition and sustainable development.


Sembcorp Industries - Key Business Segments

  • The Energy segment’s activities are in the provision of power and water to industrial, commercial and municipal customers. Key activities in the power sector include power generation, process steam production, as well as natural gas importation. In the water sector, the business offers wastewater treatment as well as the production of reclaimed, desalinated and potable water for industrial use. In addition, the business also provides on-site logistics, solid waste management and specialised project management, engineering and procurement services
  • The Marine segment focuses on providing integrated solutions for the offshore and marine industry. Key capabilities include rigs & floaters, repairs & upgrades; offshore platforms and specialised shipbuilding. From the fourth quarter of FY20e, this will be deconsolidated from Sembcorp Industries.
  • The Urban segment owns, develops, markets and manages integrated urban developments comprising industrial parks as well as business, commercial and residential space in Asia.
  • The Others/Corporate segment comprises businesses mainly relating to minting, design and construction activities, offshore engineering and others.


Sembcorp Industries - Investment Merits


Sembcorp Industries shareholders could receive a total of $2.72 per share


IPO of SEIL to crystalise value of Sembcorp Industries’s India business unit.

  • While the timing of SEIL’s listing remains uncertain, we believe this will happen sooner rather than later. Sembcorp Industries had intended to re-file their prospectus on SEIL in 2019 (having first withdrawn this in 2018), but postponed this to inject additional equity into the business to have full control in December last year. As sole owner now, we believe Sembcorp Industries will have full flexibility to evaluate a full range of growth opportunities in the renewables segment, while at the same time evaluate the right equity window to list their India business more expediently, which we estimate to have a value of about INR98bn or S$1.8bn.

Potential positive re-rating of Sembcorp Industries following the demerger.

  • The deconsolidation of Sembcorp Marine will transform Sembcorp Industries into a focused Energy and Urban business. Sembcorp Industries will now be able to focus their resources on capturing growth opportunities in two of their key segments independently of Sembcorp Marine.
  • Even though the conglomerate discount attached to Sembcorp Industries should narrow, we think this might take time as investor’s confidence in the management could take time to rebuild. For FY21e and FY22e, we expect Sembcorp Industries to see ROE improve to 7.6% and 9.6% respectively, potentially leading to a positive re-rating of Sembcorp Industries.


The Transaction: Enhancing shareholder value and increased strategic focus


Recapitalised rights in Sembcorp Marine.

  • Sembcorp Marine raised S$2.1bn in equity via a 5-for-1 renounceable rights issue of 10,463,723,020 new ordinary shares at S$0.20 per rights share. Sembcorp Industries undertook to subscribe for up to S$1.5b of Sembcorp Marine rights shares by setting off the outstanding principal of S$1.5bn under the subordinated loan facility extended to Sembcorp Marine, while Temasek Holdings has sub-underwritten the remaining S$0.6bn. With the proceeds, Sembcorp Marine has repaid Sembcorp Industries’s S$1.5bn subordinated loan facility, improving their overall net gearing for proforma FY19 to 0.45x from 1.82x.
  • Following the completion of Sembcorp Marine’s rights issue, and Sembcorp Industries’s subscription of 7,500,000,000 rights shares, representing approximately 72% of the 10,462,690,870 rights share available under the rights issue, Sembcorp Industries will distribute 4.911 Sembcorp Marine shares per every 100 Sembcorp Industries shares held by shareholders on the last date of “cum-distribution” trading of Sembcorp Industries shares. No payment is required from Sembcorp Industries shareholders to receive shares in Sembcorp Marine. Sembcorp Industries shareholders will have direct shareholdings in two focused companies, with Temasek alongside as a direct and significant shareholder. Importantly in our view, Sembcorp Industries shareholders now gain the flexibility to calibrate their holdings in the two companies based on their own investment objectives and strategy.
  • On the 7 September, Sembcorp Marine announced the successful completion of the rights issue. The company announced that valid acceptances and excess applications were received for 9,434,192,612 rights shares, representing approximately 90.2% of the 10,462,690,870 rights shares available under the rights issue.
  • Pursuant to the sub-underwriting agreement, Startree, a wholly-owned subsidiary of Temasek, has subscribed for the balance of 1,028,498,258 unsubscribed rights shares.
  • With the proceeds, Sembcorp Marine has repaid Sembcorp Industries’s S$1.5bn subordinated loan facility, improving their overall net gearing for proforma FY19 to 0.45x from 1.82x and net tangible asset from S$1.9bn to S$4.0bn.
  • Following Sembcorp Industries’s subscription of 7,500,000,000 rights shares, representing approximately 72% of the 10,462,690,870 rights share available under the rights issue, Sembcorp Industries will distribute 4.91 Sembcorp Marine shares per every 100 Sembcorp Industries shares held by shareholders on the last date of “cum-distribution” trading of Sembcorp Industries shares.
  • We see a number of positives in the move to separate Sembcorp Industries’s core business from their marine interest in Sembcorp Marine. The primary benefit we believe is that the move will unlock value for Sembcorp Industries shareholders by creating two focused companies. New demand patterns emerging in the energy sector require Sembcorp Industries to be focused on competing effectively, and focused on their core businesses (Energy and Urban). However, Sembcorp Industries’s future growth may be constrained by the Sembcorp Industries Group balance sheet which consolidates Sembcorp Marine’s debt.
  • The settlement of Sembcorp Marine’s subordinated loan with Sembcorp Industries and the proposed distribution delivered a clean demerger with an immediate deleveraging of Sembcorp Marine, which will benefit shareholders of Sembcorp Marine. Sembcorp Industries shareholders will receive Sembcorp Marine shares, with no cash outlay, in a recapitalised Sembcorp Marine with a significantly reduced net gearing from 1.82x to 0.45x due to the settlement of the subordinated loan with Sembcorp Industries and the improved cash position arising from the rights issue. Sembcorp Industries’s profitability and returns profile will also improve going forward. We expect Sembcorp Industries to see an improvement in their profit from a loss of $147m in FY20e to $326m and $449m for FY21e and FY22e respectively.
  • Lastly, the demerger will create two focused companies, allowing Sembcorp Industries to focus on their core competency. The demerger also delivers a clear investment proposition and makes Sembcorp Industries more comparable to their peers, and also reduce the conglomerate discount attached to Sembcorp Industries. This is expected to lead to a potential positive re-rating of Sembcorp Industries.


IPO of Sembcorp Energy India Ltd to crystalise value of India business

  • Sembcorp Industries could crystalise the value of their India business by listing their energy unit in India, Sembcorp Energy India Limited. Sembcorp Industries first filed its draft red herring prospectus lodged into the Securities Board of India in 2018, but subsequently withdrew this as it was injecting new equity into the business. SEIL further announced that it intends to refile a revised prospectus at “an appropriate time.., taking into consideration market conditions.”
  • Sembcorp Industries first entered the India market in 2010, establishing itself as a reliable independent power producer in the country focused on growing a clean energy portfolio. With a presence across nine states, SEIL owns and operates 35 assets, adding up to a total power capacity of 4,370MW including 1,730MW of renewable energy. The outlook for the India market remains positive, energy consumption is expected to see an increase of over 100% from 2015 to 2035.
  • SEIL owns and operates 2,640MW of thermal power projects consisting of Project1 and Project2. SEIL’s bank facilities have a AA-rating, with a stable outlook awarded by India Ratings (a wholly-owned subsidiary of the Fitch Group).
  • Going forward, we believe SEIL will pursue longer-term power purchase agreements (PPAs) as these guarantee a stable tariff higher than the spot rate and also gives them access to domestic coal supply where prices are lower and more stable than imported ones. Unlike the short-term PPAs which suffer from thin or even negative spark spread, long-term PPAs provide more profit visibility for plants. For FY19, India posted a net profit of S$100mn (accounting for 48% of their FY19 profit) vs. S$47mn in 2018 mainly due to the higher contribution from its thermal power plants as well as improved operating performance by its renewable energy assets on better wind resources and new capacity addition.
  • Renewable energy companies in India trade at about 1.7x of their book value, based on SEIL’s FY19 book value of INR65.4bn, this implies a market capitalisation of about INR111.2bn (or about S$2.1bn). We impute a slight discount to the sector average P/BV to account for SEIL’s lack of a listing track record to arrive at a valuation of INR98.1bn or S$1.8bn (~1.5x FY19 P/BV).
  • While the timing of Sembcorp Industries’s India Energy IPO remains uncertain, we believe Sembcorp Industries’s acquisition of the remaining 5.95% stake in SEIL for INR4.6bn (approximately ~S$77mn) in December last year (implying a 1.2x FY19 P/BV or a market capitalisation of INR77.3bn or S$1.5mn) will allow Sembcorp Industries to have the flexibility as sole owner to evaluate and pursue a full range of growth opportunities in the renewables segment, while at the same time seeking the right equity window to list its India business or to pursue other capital-recycling options.


Sembcorp Industries - Financial Analysis

  • See PDF report attached below for detailed analysis on Sembcorp Industries’s revenue, balance sheet & cash flow.


Sembcorp Industries - Future plans

  • Going forward, we think Sembcorp Industries’s future focus will centre around the following themes set out below:
    1. Drive long-term value creation and performance through disciplined capital allocation and systematic capital recycling;
    2. Unlock value with targeted utilities divestments of up to S$0.5 billion and proposed IPO of India energy business; and
    3. Strengthen commitment to sustainability with targets for doubling of renewables portfolio to approximately 4,000 megawatts by 2022 and a 25% reduction in carbon emission intensity.

Sembcorp Industries transformed into a focused Energy and Urban business.

  • Sembcorp Industries’s move to deconsolidate Sembcorp Marine will allow Sembcorp Industries to focus their resources and efforts on repositioning its Energy and Urban business, and capturing growth opportunities to provide solutions that support the energy transition and sustainable development. To that end, we believe Sembcorp Industries will focus on growing their renewables capacity, and reach approximately 4,000 megawatts by 2022.
  • Net profit from Sembcorp Industries’s renewable energy portfolio has increased by a CAGR of 67.6% per year from FY16 – FY19. As a proportion of total net profit from Energy, this has increased from just over 2% to 8.4% in FY19.
  • Going forward, we expect Sembcorp Industries to grow their renewables energy footprint in key markets in Singapore, China, India and the UK. In Singapore, construction of the 60 MWp floating solar photovoltaic system on Tengeh Reservoir commenced last month. The project is expected to begin full commercial operations next year with a 25-year power purchase agreement signed with PUB, Singapore’s National Water Agency.
  • The Energy and Urban business has historically generated relatively stable long-term cash flow streams, even with the Energy market exposed to the merchant market. We think the demerger will allow Sembcorp Industries to allocate capital solely to its core businesses. We expect their balance sheet and cash flows to improve post deconsolidation from Sembcorp Marine as the capital requirement falls. We expect net gearing to be reduced from 187% in FY20e to 177% and 155% for FY21e and FY22e respectively.
  • For their Urban business, Sembcorp Industries still has remaining saleable land of 2,600 hectares of saleable industrial, business, commercial and residential land. In our view, Sembcorp Industries is positioned in key growth areas in Vietnam, China and Indonesia. In Vietnam, they have nine projects strategically located in the southern, central and northern economic zones. In China, they are situated in key growth regions, and are well placed to benefit from the shift towards central-western China development. In Indonesia, central Java is expected to benefit from spillover investments from Jakarta.
  • We see a number of synergies in Sembcorp Industries’s Energy and Urban business, and we believe Sembcorp Industries will focus on capturing trends like urbanisation, electrification and decarbonisation.

The listing of SEIL will recycle capital and crystalise value on Sembcorp Industries’s India Energy portfolio.

  • While the timing of SEIL’s listing remains uncertain, we think this will happen sooner rather than later. Sembcorp Industries’s move to acquire the remaining 5.95% stake in SEIL last December (implying a 1.2x FY19 P/BV or a market capitalisation of INR77.3bn or S$1.5mn) will give the company more flexibility as sole owner to evaluate and pursue a full range of growth opportunities in the renewables segment, while at the same time seeking the right equity window to list its India business or to pursue other capital-recycling options.

Sembcorp Industries - Valuation






Terence Chua Phillip Securities Research | https://www.stocksbnb.com/ 2020-09-09
SGX Stock Analyst Report BUY INITIATE BUY 2.72 SAME 2.72


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