Singapore (Feb 21): CIMB is maintaining its “add” call on Sembcorp Industries (SCI) with an unchanged target price of $3.87 after the conglomerate on Monday said it was reorganising its India energy operations for a more streamlined shareholding structure and greater synergy.

SCI is due to conduct its full-year results briefing on Friday morning together with an update on its ongoing strategic review.

To recap, Sembcorp’s wholly-owned subsidiary, Sembcorp Utilities (SCU), has transferred its entire 88% stake in Sembcorp Gayatri Power (SGPL) to Thermal Powertech Corporation India (TPCIL) as part of the reorganisation.

TPCIL has also been renamed Sembcorp Energy India Limited (SEIL).

See: Sembcorp reorganises India energy businesses

In a Tuesday report, analyst Lim Siew Khee estimates that SIEL, if listed, could be worth about $1-2.3 billion, after benchmarking it against Indian peers that are trading at about 8.1 times 12M EV/EBITDA.

In Lim’s view, the reorganisation is a precursor to a listing of SCI’s Indian assets, which would bring SCI to a net cash position while freeing up capital for investment in other utilities assets. She also believes organisation is likely to retain about 40% of its interest in SEIL, having spent years developing the market.

“If SCI's Indian operations is detached, we estimate its net gearing will reduce to 0.6 times, from 1.1 times currently as it carried about $3.6 billion of debt as of 9M17. SCI’s earnings could also be boosted as interest costs for Indian assets are at about $400 million p.a.,” says the analyst, who sees further clarity arising from the group’s strategic review as a key catalyst moving forward.

“Together with Sembcorp Marine’s (SMM) receipt from Borr Drilling (US$500 million) for the sale of nine jack-up rigs and US$385 million for the sale of semi-submersible rig, West Rigel, net gearing could further improve to 0.3 times, in our estimate,” she adds.

See: Buyer for West Rigel rig found but graft probe still weighs heavy on SembMarine

With regards to market expectations of some corporate exercise on SCI’s stake in SMM post the former’s strategic review, Lim reiterates a few options such as an outright divestment, which could unlock $3.4 billion of cash for SCI’s 61% stake – although this would also mean that the group would have to forego the potential upcycle of order recovery.

An alternative would be the privatisation of SMM, which Lim stresses she is not in favour of as such a move would negate the streamlining of its Indian assets.

Other options including dividend in specie, deemed “mildly positive” by the analyst with the deconsolidation of SMM’s debt, as well as reducing its stake in SMM to below 50%.

“Again, we think this [a reduction of stake] would be mildly positive with the deconsolidation of debt and the potential of riding the upcycle. However, this would mean SCI would still be seen as a non-pure play in utilities,” concludes Lim.

As at 10.49am, shares in SCI are trading 5 cents higher at $3.33, or 0.83 times FY18 book.