On September 9, Sembcorp Marine (SMM) demerged from Sembcorp Industries (SCI) and the latter’s share prices has since significantly outperformed, rising by 36% from its demerged price of 96 cents per share.
See: It's official: Sembcorp Industries and Sembcorp Marine will decouple
In a September 18 report by UOB Kay Hian, analyst Adrian Loh says, “We attribute this to the fact that the removal of SMM as its subsidiary has given the market greater confidence in SCI’s future business outlook as it will not have the millstone of having to provide financial support for SMM going forward.”
With that, the research house is positive on the stock and has maintained its “buy” recommendation on SCI with an upgraded target price of $1.66 from just $1.25 previously, to reflect a higher price-to-book ratio of 0.8 times (from 0.6 times).
Loh views this target price increase as reasonable, as he says, “the higher target multiple reflects a better comparability between SCI and its regional utilities peers without the offshore marine overhang”.
Furthermore, SCI on September 11 announced that it expanding its presence in China, as it inked a memorandum of understanding (MOU) with NASDAQ-listed GDS Holdings to develop and provide renewable energy solutions for GDS’s data centres in China, as well as looking for opportunities to realise operational synergies between GDS’s data centres and Sembcorp’s renewable-power generation and water management systems.
See: Sembcorp Industries signs MOU with China's GDS on renewable energy initiatives
The group has also stated that it will be GDS’s strategic partner in the development of integrated green solutions to support GDS’s environmental sustainability goals.
Although no potential financial impact as provided from this MOU, Loh notes that GDS reported a strong set of 2Q20 results with revenue growing 36% y-o-y to US$189 million, while EBITDA rose 48% y-o-y to US$90 million.
Importantly, its EBITDA margin expanded nearly 4 percentage points to 47.2%. Operationally it saw a 51% y-o-y increase in its total committed and pre-committed area to about 333,000m³ while its area-in-service increased by 48% y-o-y to over 266,000m³. GDS’s clients include Alibaba, Amazon Web Services, Huawei, JD.com and Bytedance.
As at 4.35pm, shares in SCI are trading at $1.34, or 0.6 times FY20 book with a dividend yield of 1.9%.
