PhillipCapital initiates Sembcorp Industries into ‘buying’ upon completion of rights issue

PhillipCapital has initiated coverage of Sembcorp Industries (SCI) with a “buy” call and a price target of $ 2.72, representing a 41.7% increase over the counter. The call comes after the completion of the rights issue by Sembcorp Marine (SembMarine) after both companies announced the dissociation of their respective businesses on June 8. “We believe that the market could allocate a 0.7x FY21e P / BV for SCI (ex. SCM), a slight discount to its 10-year historical average of SCI (ex. SCM), which will give us $ 1.75 / share. “Writes senior research analyst Terence Chua in a report on Sept. 9.” SCI shareholders will also receive 4,911 SCM Shares for each share owned. Based on SCM’s latest closing price of 19.9 cents on September 7, SCI shareholders could receive a total of $ 2.72 / share ($ 1.75 + (4,911 x $ 0.199)), ”he adds. Furthermore, the brokerage expects a new positive rating from SCI after the spin-off, as its profitability and return on equity (ROE) are estimated to improve to 7.6% and 9.6% respectively from 2.7% in FY21e. “The deconsolidation of SCM will transform SCI into an Energy and Urban Planning business. SCI will now be able to focus its resources on capturing growth opportunities in two of its key segments independently of SCM, ”says Chua. “Although the conglomerate discount associated with SCI should be reduced, we believe this could take time as investor confidence in the management could take time to rebuild,” he adds. The IPO of Sembcorp Energy India Limited (SEIL) could also cement the value of SCI’s business unit in India, which the brokerage estimates is worth approximately 98 billion rupees ($ 1.8 billion). SCI previously intended to resubmit its SEIL prospectus in 2019, but postponed this to have full control in December 2019. “As a sole proprietor now, we believe that SCI will have full flexibility to evaluate a full range of opportunities for growth in the renewable energy segment, while at the same time evaluating the appropriate capital window to list their business in India more quickly, ”says Chua. “We expect SCI to see an improvement in profitability and generate a positive operating cash flow of $ 854 million and $ 1.2 billion for fiscal year 21e and fiscal year 22e respectively, which will strengthen their balance sheet and place them in good shape. position to overcome the current crisis ”, he concludes. Sembcorp shares closed unchanged at $ 1.91 on September 8, with a dividend yield of 0.0% and 2.8% for fiscal year 20e and fiscal year 21e respectively.