Sembcorp Industries’ shares in steady uptrend with financial metrics set to improve

• Sembcorp Industries looks more attractive now, without its marine unit weighing it down
• There may also be a “scarcity premium” for its stock, analysts said
• However, its utilities segment remains weak, and the assets are getting older

Sembcorp Industries share price: How has it performed?

Sembcorp Industries’ (SCI) shares have been steadily climbing since their first day of ex-entitlements trade on 09 September 2020, ahead of the group’s split with its marine and offshore engineering unit, Sembcorp Marine.

Since then, SCI’s stock price has jumped nearly 60%. It rose 1.6% on the day to finish Tuesday (01 December) at S$1.86.

The energy, water and urban development group’s recent uptrend also comes as Singapore’s stock benchmark, the Straits Times Index (STI), posted a robust 15.8% price gain and 16.2% total return for November 2020 - marking the index’s strongest month of gains since May 2009.

SCI has been one of the 100 most traded stocks in Singapore this year, having posted a year-to-date total return of 62%.

Where next for Sembcorp Industries?

UOB believes the Singapore-based industrial conglomerate is ‘well positioned’ for recovery in 2021 thanks to an impending revival in energy demand on a higher certainty of global economic recovery, following news of successful Covid-19 vaccine trials.

UOB analyst Adrian Loh maintained his “buy” call on SCI and increased the target price to S$2.02, from S$1.66 previously.

The higher target price was based on an upgraded target price-to-book multiple of 0.9 times. Loh said this was reasonable, as it ‘reflects a better comparability between SCI and its regional utilities peers without the offshore marine overhang’ following the demerger.

OCBC kept its ‘hold’ rating on SCI early this month, with a fair value of S$1.63. The research team wrote that while the energy segment provides relative stability, it had taken a hit from the Covid-19 pandemic.

OCBC also pointed to a possible ‘scarcity premium’ for the stock, given that the dearth of earnings growth in the Singapore industrials sector has offered few choices for investors looking to allocate funds in the sector.

The research team believes that SCI’s key financial metrics such as return on equity will likely improve following its upcoming turnaround, having parted ways with Sembcorp Marine.

What’s weighing Sembcorp Industries down?

That being said, the OCBC analysts ‘would be even more encouraged’ if a fundamental pick-up in the utilities space were to drive SCI’s improvement in the future.

Its utilities businesses in certain markets such as India and the UK had already been soft even before the onset of the coronavirus outbreak, affected by individual industry-specific factors. A resurgent Covid-19 wave also poses a key risk, OCBC said.

In Singapore, SCI saw a decrease in energy demand due to the ‘circuit breaker’, lower gas sales, and loss of profit from its divested Jurong Aromatics Corporation (JAC) assets.

Furthermore, the group’s utility assets are getting older, which means replacement capital expenditure could be required in the future, according to OCBC.

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