SINGAPORE (Feb 26): Analysts are optimistic on the outlook of Sembcorp Industries (SCI) post the outcome of its strategic review, even as the group last week reported a 84.6% decline in its 4Q earnings to $22.8 million as its marine segment continued to drag on profitability.
See: Sembcorp to list India energy unit on BSE, NSE after strategic review; reports 84.6% fall in 4Q earnings to $22.8 mil
In a Monday report, DBS analyst Ho Pei Hwa estimates that the group will see proceeds that will “easily exceed” $1 billion over the next two years after factoring in the initial public offering (IPO) of its India assets, which is significantly higher than the $870 million of IPO or divestment proceeds which the group has achieved over the last five years.
The research house has maintained its “buy” call on the counter with a lower price target of $4.40 from $4.50 previously, which translates to 1.1 times book.
“We believe in the long-term growth prospects of SCI’s utilities arm, which has expanded its global footprint and recently made forays into key emerging markets – India, Bangladesh and Myanmar,” says Ho.
“While the marine spin-off did not happen in the recent strategy review, we hold on to our belief of a potential merger between Keppel’s O&M arm and Sembcorp Marine (SMM) view of keener competition in the sector. The potential spin-off of its marine arm could re-rate SCI’s undervalued utilities business that is overshadowed by the cyclical marine business,” she adds.
OCBC also reiterates its “buy” call on SCI while lowering its fair value estimate to $3.84 from $3.95 previously after tweaking its estimates to factor in its full-year dividend of 5 cents per share.
In a separate report, lead analyst Low Pei Han says that while the IPO of Sembcorp Energy India comes as “no surprise to the market”, what she finds particularly surprising and encouraging was the management’s aim to achieve double-digit return on equity (ROE) in the next five years.
In her view, potential ways to achieve the targeted ROE figures include a recovery of the group’s India utilities operations as the market tightens, new order flows from marine, and greater returns from a revamped utilities business.
“An example of a new income stream is the start of a fuels trading business (asset-backed and not purely speculative), as SCI may be able to arbitrage between LNG and piped natural gas, being both a gas buyer and gas user (in power and steam),” saw Low.
Meanwhile, Phillip Capital is keeping its “accumulate” rating on the stock but raising its target price estimate to $3.86 from $3.70 on expectations of an improvement stemming from the group’s new strategy, which has prompted the research house to tweak its FY18E EPS up to 19.8 cents from 17.8 cents previously.
Highlighting SCI’s plants under Thermal Powertech Corporation India (TPCIL), Sembcorp Gayatri Power (SGPL) and Sembcorp Green Infra (SGIL) as quality assets, Phillip analyst Chen Guangzhi says the group could monetise these assets at good prices if SCI proceeds its intended IPO in the near-term.
“However, the expectation of prolonged weak profitability from marine segment could stall the recovery on the group level in the short term. On a long-term perspective, we think it [SCI’s listing of its India assets] is in the right direction,” notes Chen.
“After all, clean energy gradually will become one of the mainstream developments in the foreseeable future. The diversified global footprints that it is going to be entrenched ensure a higher growth while lower operational risks,” he adds.
As at 3:04 pm, shares in SCI are trading 4 cents lower at $3.19, or 0.79 times FY18F book value based on DBS estimates.
