Sembcorp Industries - UOB Kay Hian 2020-09-18: Charting Its Own Path


Sembcorp Industries - Charting Its Own Path

Outperformance of Sembcorp Industries share price

Expanding its renewable-energy presence in China.

  • On 11 Sep 20, Sembcorp Industries announced that it had signed an MOU with NASDAQ-listed GDS Holdings (GDS) to develop and provide renewable energy solutions for GDS’s data centres in China, as well as looking for opportunities to realise operational synergies between GDS’s data centres and Sembcorp’s renewable-power generation and water management systems.
  • Sembcorp Industries has stated that it will be GDS’s strategic partner in the development of integrated green solutions to support GDS’s environmental sustainability goals.

New China growth angle

  • While Sembcorp Industries did not provide any potential financial impact from this tie-up with GDS, we note that the latter’s 2Q20 results were extremely strong with revenue growing 36% y-o-y to US$189m while its EBITDA rose 48% y-o-y to US$90m.
  • Importantly, its EBITDA margin expanded nearly 4ppt to 47.2%. Operationally it saw a 51% y-o-y increase in its total committed and pre-committed area to c.333,000m³ while its area-in-service increased by 48% y-o-y to over 266,000m³. GDS’s clients include Alibaba, Amazon Web Services, Huawei, JD.com and Bytedance.

Sembcorp Industries - Valuation & Recommendation

  • Reiterate BUY on Sembcorp Industries with an updated P/B-based target price of S$1.66, pegged at 0.8x P/B (previously 0.6x) to its end-1H20 book value of S$2.08/share.
  • Our new target P/B multiple is a discount of 8% to its 5-year P/B average of 0.86x, which we view as reasonable, given that the market will have a much better look through to Sembcorp Industries’ earnings without the ‘fog’ of Sembcorp Marine’s losses (see net profit chart on RHS). However, we are reluctant to ascribe a higher P/B multiple to Sembcorp Industries at this stage given that:
    1. the company has businesses that are still struggling as they lack regulated earnings, notably UK Power Reserve, and
    2. the uncertain nature and trajectory of the regional and global economic recovery post-COVID-19 affects energy demand.

Regional utilities peers trade at higher P/B multiples

  • We highlight that gas & thermal utilities peers in the region trade at a 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 and thus we are not able to undertake a comparable-company valuation.
  • Nevertheless, with Sembcorp Industries trading at 2021 P/B of 0.5x, we are confident that the valuation gap to its peers will close in the next 6- 12 months.

Meaningful upside in the medium to long term, based on earnings multiples.

  • Looking at Sembcorp Industries’ 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.

No longer bound by Sembcorp Marine’s fortunes

Sembcorp Industries' share price catalyst:

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-09-18
SGX Stock Analyst Report BUY MAINTAIN BUY 1.66 UP 1.25