SEMBCORP INDUSTRIES LTD (SGX:U96)
Sembcorp Industries - Re-rating Continues
- Sembcorp Industries's share price continues to appreciate.
- Dearth of earnings growth in SG industrials sector means few choices for the investor.
- Need more concrete evidence of earnings growth in core utilities business subsequently.
Sembcorp Industries now trading around 1.0x book
- Since our last HOLD-rated report “Broken Free” on 10 September 2020, Sembcorp Industries's share price has continued to appreciate and this is after it has risen by ~50% from our 9 June 2020 BUY-rated report. At S$1.66 (close of 6 Nov 2020), Sembcorp Industries (SGX:U96) is trading at 1.0x book, based on the pro-forma NAV/share of Sembcorp Industries as at end June 2020 (assuming the de-merger and rights transaction took place then) of S$1.67, which we view as fair.
Divestments as part of capital recycling efforts
- Sembcorp Industries also recently announced the divestment of Aguas de Panama S.A. (APSA) for S$64m. APSA is a municipal water asset in Panama under a 30-year concession that commenced in 2002, and the disposal resulted in a net gain of ~S$21m.
- Over the past 18 months, Sembcorp Industries has reduced or divested non-core businesses for ~S$441m. The re-allocation of capital into more promising businesses should help improve ROE over time.
Utilities to be weak in 2020
- Even before COVID-19, the utilities business in certain countries was already relatively soft, such as in India and the UK due to individual industry-specific factors. A resurgent COVID-19 wave is a key risk.
- In Singapore, energy demand was also impacted by the circuit breaker, lower gas sales and loss of profit from divested JAC assets. Utility assets are also getting older (c. < 20 years), and replacement capex could be required in the future.
Scarcity premium?
- Within the Singapore industrials space, there is a dearth of earnings growth, and there are few choices for investors looking to allocate funds in the sector. Sembcorp Industries, with an upcoming turnaround due to the de-merger with Sembcorp Marine (SGX:S51), will see key financial metrics such as ROE turn for the better, but we would be even more encouraged if improvement in the future were to be driven by a fundamental pick-up in the utilities space, such as the group’s businesses in India and the UK.
- See Sembcorp Share Price; Sembcorp Target Price; Sembcorp Analyst Reports; Sembcorp Dividend History; Sembcorp Announcements; Sembcorp Latest News.
- We adjust our estimates and our SOTP-based fair value is now S$1.63 (implying ~1.0x book).
OCBC Research Team
OCBC Investment Research
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https://www.iocbc.com/
2020-11-09
SGX Stock
Analyst Report
1.63
DOWN
2.000
