Citi Research's Jame Osman has kept his "buy" call and $4.36 target price on Sembcorp Industries U96 , following reports that the utilities and energy company plans to offload its waste management unit for some $500 million.
SembWaste reportedly contributes around $50 million in in FY2022 ebitda to SCI, which accounts for 3% of Osman's FY2023 projections.
"While its disposal is unlikely to move the needle materially on the company's overall gearing position," writes Osman in his May 10 note, adding that the disposal at $500 million would potentially improve gearing levels marginally to around 1.3x versus 1.4x as at end-FY22.
"We view the move as an opportunity for the company to recycle capital toward focusing on the expansion of its renewables portfolio capacity and further its brown-to-green transition strategy," he adds.
"We also look toward management's plans to refresh its 2025 strategic targets, likely sometime in the second half this year," he adds.
In response, SCI says in its separate statement on May 10 that it regularly reviews its portfolio from time to time to ensure strategic fit and maximise shareholder value.
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"No definitive transaction in respect of any potential sale has been entered into by Sembcorp with any party, and there is no certainty that any such transaction will materialise," adds SCI.
SembWaste, the unit reportedly being sold, is one of the three public waste collectors appointed by the government for public cleaning, and recycling services in Singapore. The local waste management industry has seen a few transactions in recent years.
On July 2020, SCI bought Veolia Environment’s Singapore environmental services arm and public cleaning business for about $28 million.
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Last August, Keppel Corp BN4 bought an 80% stake in waste management company 800 Super Holdings for $304 million from leading private equity firm KKR, valuing the company at $380 million.
800 Super, in turn, was privatised in 2019 at a valuation of $160 million. It was listed back in July 2011.
The sale of SembWaste, according to Osman, will let SCI better focus on building its renewables portfolio capacity.
SCI had previously said it has a headroom of some $3.7 billion, in a mix of debt and cash, that can be used to make further investments in renewable energy, and therefore, there's no need to raise new equity nor take on new debt for now.
Osman calls SCI, trading at 8x FY2023 earnings "inexpensive" relative to its regional utilities peers, as well as renewables stocks.
"Management has also executed well on achieving its brown-to-green transition targets, in our view, and we believe decarbonization initiatives regionally and domestically provide an opportunistic backdrop for SCI to capture long-term business growth," adds Osman.
