SINGAPORE (Aug 6): DBS Group Research is still clinging on to the hope of a merger between Keppel’s offshore & marine arm and Sembcorp Marine despite the spinoff not happening in last year’s strategy review.
In a Monday report, analyst Ho Pei Hwa says the potential spinoff of its marine arm could re-rate Sembcorp’s undervalued utilities business that is overshadowed by the cyclical marine business.
Ho says Sembcorp offers a unique value proposition as a proxy to ride the cyclical O&M upturn and is supported by a defensive utilities business with India operations recording all-time high profits in 2Q18.
“We believe continuous improvement in India will re-rate Sembcorp’s utilities business, which is undervalued at 0.5x P/BV and 6x PE against 6.5% ROE,” says Ho who believes in the long-term growth prospects of the utilities arm which has expanded its global footprint and made forays into the markets of India, Bangladesh, Vietnam and Myanmar.
Ho says the power market in India is recovering with narrower oversupply in the market and higher tariff. This should swing the India operations to profit this year. Sembcorp Energy India Limited (SEIL) operates 3,567MW power capacity comprising 2,640MW of thermal power and 927MW of renewable capacity as of end December 2017.
SEIL has been awarded an additional 800MW of wind capacity since and management targets to grow renewable capacity in India by 300-500MW p.a. The potential IPO of SEIL could realise revaluation gains of $100-200 million, based on DBS’s estimates.
Meanwhile, Sembcorp is reportedly among the eight interested parties for Hyflux’s Tuaspring project that combines a desalination plant and a gas turbine power plant.
Other potential bidders named include Keppel Corp and YTL Power. The asset is believed to have book value of $1.5 billion as of end March.
Hyflux, which started a court-supervised reorganisation process in May, expects to receive bids for Tuaspring by Oct 1.
Ho says while power assets in Singapore are currently plagued by oversupply issue, hopefully the industry consolidation will accelerate sector recovery.
DBS is maintaining its ‘buy’ with $3.90 target price.
As at 3.23pm, shares in Sembcorp are up 8 cents at $2.71 or nearly 11 times FY19F earnings.
