SINGAPORE (Aug 4): DBS Group Research continues to like Sembcorp Industries as a proxy to ride the cyclical Offshore & Marine upturn which is also supported by a defensive utilities business.
Under the helm of the new CEO, Sembcorp Industries is undertaking a complete review of businesses and strategic direction, focusing on performance, sustainability and value creation. The review is expected to be concluded in 4Q17.
In a Friday report, analyst Ho Pei Hwa says while it is premature to shed more light on the future direction of Sembcorp, this may revive market speculation on potential rationalisation of Sembcorp Industries, Sembcorp Marine and Keppel Corporation.
Since Aug 2015, DBS has flagged the potential merger between Keppel’s O&M arm and Sembcorp Marine during the structural downturn. The potential spin-off of its marine arm could re-rate Sembcorp Industries’ undervalued utilities business that is currently overshadowed by a weak marine outlook.
“We believe in the long-term growth prospects of Sembcorp Industries’ utilities arm, which has expanded its global footprint and recently made forays into key emerging markets – India, Bangladesh and Myanmar,” says Ho.
See: Sembcorp reports 36% decline in 2Q earnings to $55.3 mil
“Maintain ‘buy’ with slightly higher target price of $4.00, after trimming FY17/18F earnings by 4%/1.5% to reflect larger losses at its second power plant in India,” says Ho who expects weakness in its utilities business in India to take longer to resolve.
Given its diverse earnings stream and various listed assets, DBS derives its fair value for Sembcorp Industries based on the sum of its different parts: market valuations of its stakes in listed companies Sembcorp Marine (SGX-listed, 60.6% stake), Gallant Venture (SGX-listed, 11.96% stake) and Salalah (Muscat stock exchange, 40% stake) as well as earnings from utilities and urban development.
“For its holding company position, DBS has applied a 10% conglomerate discount to the reappraised net asset value (RNAV). We derive a target price of $4.00, translating to 1.1x P/BV,” says Ho.
As at 3.31pm, shares in Sembcorp Industries are down 4 cents at $3.18.
