SINGAPORE (May 21): CGS-CIMB Research and DBS Vickers Securities are maintaining their “add” and “buy” calls on Sembcorp Industries (SCI) with target prices of $3.41 and $3.90, respectively.

This comes after the group last week posted 21% higher 1Q earnings of $77 million on higher contributions from its energy segment, which was mainly driven by improved performance from India and the recognition of peak winter availability payments for UK Power Reserve.

In a May 15 report, CGS-CIMB analyst Lim Siew Khee says she considers SCI cheap at $2.54, which is 0.6 times FY19 price-to-book value.

In particular, Lim thinks the group’s UK business winter gains should come off in 2Q19 and 3Q19 in the absence of triad payments, as the first quarter typically marks the end of winter – while its Sembcorp Energy India Limited (SEIL) 2 project could potentially sustain gains ahead should coal prices and plant load factor (PLF) remain at current levels.

Going forward, she sees consistent performance from SCI’s India operations as a key catalyst.

DBS analyst Ho Pei Hwa separately highlights the India business as a key growth driver amid a recovering power market and an expected reversal of the current peak surplus by FY20, according to research house CRISIL.

She believes SCI’s energy business is undervalued at 0.6 times P/BV and 6 times P/E against 6-7% ROE.

“We believe in the long-term growth prospects of SCI’s energy arm, which has expanded its global footprint into key emerging markets – India, Bangladesh, Vietnam and Myanmar. We hold on to our belief of a potential merger between Keppel’s O&M arm and SMM in view of keener competition in the sector,” says Ho.

“The potential spin-off of its marine arm could re-rate SCI’s undervalued utilities business that is being overshadowed by the cyclical marine business,” she adds.

As at 10:28am, shares in SCI are trading 1 cent lower at $2.52 or 0.6 times FY19F book value, based on DBS estimates.