SINGAPORE (June 1): DBS Group Research’s analyst Ho Pei Hwa is upgrading her call on Sembcorp Industries to “buy” from “hold” previously with an unchanged target price of $1.70.

Sembcorp was sold down by 10% last Friday, underperforming the Straits Times Index (STI) and Sembcorp Marine (SembMarine) by 12% and 8% respectively over the past one week.

“We believe the sell-off was due largely to its removal from MSCI Index, pushing valuation to an unwarranted low of 0.34 times price-to-book ratio,” says Ho.

The analyst is hold on to her view of a potential merger between Keppel’s Offshore & Marine arm and SembMarine, given the keen competition within the sector.

“We believe a spin-off of its marine arm could re-rate Sembcorp’s undervalued utilities business (by at least 30% or 40 cents/share), which is currently overshadowed by the cyclical marine business,” says Ho.

Meanwhile, Sembcorp’s operations in emerging markets seem promising and are looking to be its long-term growth engines.

Sembcorp’s India operations swung from a loss of $58 million in FY17 to a profit of $32 million (excluding one-offs) in FY19, and growth would help to drive group earnings. Besides India, Sembcorp has also made forays into other emerging markets – Bangladesh, Vietnam and Myanmar.  

Non-marine segments have been overshadowed by exposure to the cyclical marine sector.

We believe there is room for upward revision in non-marine’s valuation multiple to 0.6- 0.7 times price-to-book value as operating environment in India, the UK and Singapore improves, partially offset by some downside risks to SembMarine as order wins momentum could be slower than expected amid global capex cut,” says Ho.

As at 11.30am, shares in Sembcorp Industries are trading at $1.41 with a dividend yield of 3.3%.