SEMBCORP INDUSTRIES | BUY
TARGET PRICE: $4.40
FEB 26 CLOSE: $3.20
DBS Group Research, Feb 26
We continue to like Sembcorp Industries (SCI) as it offers a unique value proposition as a proxy to ride the cyclical offshore and marine upturn, and it is supported by a defensive utilities business.
Its focus on more proactive capital recycling will allow SCI to augment its balance sheet (lower gearing by 0.15 times) and enhance return on equity. Including the initial public offering (IPO) of the India assets, we estimate proceeds will easily exceed $1 billion over the next two years, much higher than $870 million of IPO/divestment proceeds achieved over the last five years.
We believe in the long-term growth prospects of SCI's utilities arm, which has expanded its global footprint and recently made forays into key emerging markets.
While the marine spin-off did not happen in the recent strategy review, we hold on to our belief of a potential merger between Keppel's Offshore & Marine arm and Sembcorp Marine in view of keener competition in the sector.
Given its diverse earnings stream and various listed assets, we derive our fair value for SCI based on the sum of its different parts. For its holding company position, we applied a 10 per cent conglomerate discount to the reappraised net asset value to derive a target price of $4.40, translating to 1.1x price-to-book value.
ST ENGINEERING | BUY
TARGET PRICE: $4.04
FEB 26 CLOSE: $3.44
RHB Research, Feb 26
ST Engineering (STE) reported 4Q17 pre-tax profit of $174 million versus our estimate of $165 million.
The better-than-expected performance was aided by strong contributions from the aerospace division and lower-than-estimated tax rate.
We expect STE's strong focus on passenger-to-freighter (P2F) conversions to continue to drive growth at its aerospace business during the forecast period.
A greater push for defence exports, higher P2F conversions and pursuing Smart City-related contracts in and outside of Singapore will remain key drivers for growth in the near term.
Its expanding focus into robotics, cyber security and potential new business areas in healthcare, along with a unified approach towards growing its businesses under the single ST Engineering brand should lay the foundation for sustained long-term growth.
Its existing order book of $13.2 billion provides revenue visibility for two years. While share price has underperformed lately, we believe continuing growth prospects from P2F conversions and proxy to Smart Nation initiatives should drive a re-rating for the stock.
Key risks include weakness in marine business, delays in order inflow and litigation costs.
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