CGS International and Maybank Securities have maintained their “buy” calls on Sembcorp Industries U96 after Sembcorp announced that it was divesting its waste management arm, Sembcorp Environment. CGSI has kept its target price unchanged at $7.32 while Maybank Securities has maintained its target price at $6.
Sembcorp announced on Nov 8 that it entered into a share purchase agreement to sell its entire stake in Sembcorp Environment to SBT Investment 2, a wholly owned subsidiary of PT TBS Energi Utama Tbk.
Sembcorp Environment is the parent company of SembWaste and Sembcorp Enviro Services, which are involved in processing, as well as the collection and recycling of industrial, commercial and municipal solid waste.
The total cash consideration will be $405 million, a 43% premium over net asset value (NAV) as of June 30. The consideration implies an 18 times FY2024 price-to-earnings (P/E) ratio based on Sembcorp Environment’s annualised 1HFY2024 ended June, profit before tax (PBT).
Based on pro-forma disclosures, the transaction will be 3.4% accretive to net tangible assets (NTA) and 13.4% to earnings per share (EPS), including divestment gains of $114 million, Maybank analyst Krishna Guha says.
“Excluding the gains and factoring in financing savings, we estimate 4% to 5% earnings accretion,” Guha adds.
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Maybank’s Guha notes that Sembcorp will use the sales proceeds to invest further in the energy business to achieve the 2028 strategic roadmap.
Furthermore, Sembcorp announced in its 1HFY2024 results that its public cleaning contract for the Central-North region has not been renewed.
According to Maybank’s Guha, the proposed sale should mitigate any adverse business impact from the non-renewal of the contract.
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On Nov 15, Sembcorp announced that it completed the acquisition of a 30% stake in local power producer, Senoko Energy, for $96 million.
Maybank’s Guha believes that part of the proceeds may be used to finance this purchase.
Sembcorp first announced the potential divestment of SembWaste, together with its energy from waste (EfW) plant in June 2023, but this was terminated in July 2023.
CGSI analysts Lim Siew Khee and Meghana Kande believe this could be due to pricing.
According to CGSI’s Lim and Kande, this sale is in line with Sembcorp’s strategy to recycle capital for growth in renewables and reduce debt.
“Assuming 60% of proceeds are used to pay down debt, the loss of income could be offset by savings in financing costs, in our view,” Lim and Kande add.
As at 4.07pm, units in Sembcorp are trading 10 cents up or 1.99% at $5.12.
