Sembcorp Industries - UOB Kay Hian 2020-09-08: A Deep Value Utilities Play Trading At 50% Discount To Regional Peers

SEMBCORP INDUSTRIES LTD (SGX:U96)

Sembcorp Industries - A Deep Value Utilities Play Trading At 50% Discount To Regional Peers

Ahead of the demerger of Sembcorp Marine from Sembcorp Industries, we highlight the latter as a deep-value utilities play that should see a re-rating in the next few months. On 2021F PE and P/B, the company trades at 40-50% discount vs regional peers.
We upgrade our earnings for 2020-21 as Sembcorp Industries will no longer consolidate Sembcorp Marine losses. Our current P/B-based valuation for Sembcorp Industries, excluding Sembcorp Marine, is S$1.25.

With Sembcorp Marine off its books by 9 September, we believe Sembcorp Industries valuation should re-rate upwards in the medium to long term, and trade more in line with regional utilities peers rather than reflect the fortunes (or otherwise) of Sembcorp Marine and the offshore & marine industry.
In the short term, we see value in Sembcorp Industries, given that up to S$0.98/share or half of its current share price is made up of ‘free’ Sembcorp Marine shares. On our estimates, Sembcorp Industries ex-Sembcorp Marine is currently trading at 0.5x 2020F P/B - a 54% discount to regional utilities peers’ average of 1.1x P/B.

On 18 Aug 20, Singapore’s Public Utilities Board (PUB) and Sembcorp Industries jointly announced that they will build one of the world’s largest inland floating solar photovoltaic (PV) systems at the Tengeh Reservoir in the western part of Singapore. See Sembcorp's announcements.
The 60 megawatt-peak (MWp) PV system is a large-scale deployment of solar panels that takes advantage of PUB’s large expanse of water bodies and reservoirs, moving away from rooftops and vertical spaces. The project will generate enough power for 16,000 four-room HDB households for a year, or to power PUB’s local water treatment plants, offsetting 7% of PUB’s annual energy needs. Full commercial operations start in 2021 (over a 25-year life span) with Sembcorp Industries having already secured a S$40m loan from DBS for this project.

On 1 Sep 20, Sembcorp Industries divested its entire 32% stake in a joint venture company called Shenzhen Chiwan Sembawang Engineering (CSE) for Rmb150m (c.S$29.4m). The divestment of this non-core asset is in line with the company’s capital recycling efforts as well as its exit from the offshore marine industry.
Shenzhen Chiwan Sembawang Engineering fabricates and sells offshore engineering, onshore industrial and structural engineering steel structure products. Sembcorp Industries had taken a S$30m impairment charge on Shenzhen Chiwan Sembawang Engineering for 1H20 and thus its carrying value of Shenzhen Chiwan Sembawang Engineering was S$27m at end-1H20. The transaction is expected to be completed by the end of the year and result in a small S$2m gain.

We raise our earnings forecasts for 2020-21 by 19% and 23% respectively as we have taken out Sembcorp Industries’s share of losses at Sembcorp Marine. For 2020, we expect Sembcorp Industries to record its share of expected Sembcorp Marine loss for the period 1 July to 11 September, the latter being the expected date for the crediting of Sembcorp Marine shares to Sembcorp Industries shareholders and the completion of the demerger transaction.
Our current SOTP-valuation for Sembcorp Industries only is S$1.25, which uses a target P/B of 0.6x for the utilities segment – a 30% discount to the company’s 5-year historical average P/B. In addition, the Sembcorp Marine valuation uses the 1:4.911 ratio of Sembcorp Industries vs Sembcorp Marine shares, as per Sembcorp's announcements on 7 Sep 20.
We highlight that gas & thermal utilities peers in the region trade at P/B of 1.0-2.3x, renewables peers trade at 1.3-4.7x P/B while water & waste treatment peers trade at 1.8-2.4x P/B. Unfortunately, Sembcorp Industries does not disclose the book value of its various business segments in this manner.

Looking at Sembcorp Industries’s utilities comparables in the region, there appears to be meaningful valuation upside in excess of S$3.70 (excluding a holding company discount) if we were to use comparable PE multiples for its three business segments.
See Sembcorp Industries Share Price; Sembcorp Target Price; Sembcorp Analyst Reports; Sembcorp Dividend History; Sembcorp Announcements; Sembcorp Latest News.
Sembcorp Industries share price catalyst: Sustained economic recovery post COVID-19 outbreak, thus leading to increased energy and utilities demand.
Other risks: We highlight the possibility that Sembcorp Industries may drop out as one of the constituents of the 30-member Straits Times Index if its market capitalisation falls below S$2b.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-09-08

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