PhillipCapital has initiated coverage on Sembcorp Industries (SCI) with a “buy” call and a target price of $2.72, representing a 41.7% upside on the counter.

The call comes following the completion of the rights issue by Sembcorp Marine (SembMarine) after both companies announced the decoupling of their respective businesses on June 8.

“We believe the market could assign a 0.7x FY21e P/BV for SCI (ex. SCM), a slight discount to their 10-year historical average of SCI (ex. SCM), which will give us $1.75/share,” writes senior research analyst Terence Chua in a report dated September 9.

“SCI shareholders will also receive 4.911 of SCM shares for every one share held. Based on SCM’s last closing price of 19.9 cents on the 7 September, SCI shareholders could receive a total of $2.72/share ($1.75 + (4.911 x $0.199)),” he adds.

Furthermore, the brokerage expects a positive re-rating of SCI following the demerger 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 business. SCI will now be able to focus their resources on capturing growth opportunities in two of their key segments independently of SCM,” says Chua.

“Even though the conglomerate discount attached to SCI should narrow, we think this might take time as investor’s 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 India business unit, which the brokerage estimates to have a value of about INR98 billion ($1.8 billion).

SCI previously intended to re-file its prospectus on SEIL in 2019, but postponed this to have full control in December 2019.

“ As sole owner now, we believe SCI will have full flexibility to evaluate a full range of growth opportunities in the renewables segment, while at the same time evaluate the right equity window to list their India business more expediently,” says Chua.

“We expect SCI to see improved profitability and generate positive operating cash flow of $854 million and $1.2 billion for FY21e and FY22e respectively, which will strengthen their balance sheet and puts them in a good stead to ride out the current crisis,” he concludes.

Shares in Sembcorp closed flat at $1.91 on September 8, with a dividend yield of 0.0% and 2.8% for FY20e and FY21e respectively.