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Difficulty: Moderate


If you’ve followed our blog, you might have read our earlier articles on Sembcorp Industries (SCI).

As SCI shareholders will be entitled to receive SMM stock on 11 Sep (Fri) as a result of the SCI/SMM demerger, we thought it would be apt to provide a quick update at this juncture.

We will be using the following acronyms in this article:

  • Sembcorp Industries = SCI
  • Demerged Sembcorp Industries = DSCI
  • Sembcorp Marine = SMM.

As disclosed in our prior articles, we do have holdings in SCI stock at the time of publication. As SCI has traded up to our fair value (mentioned in this article) on 16 September 2020, we have taken profit on the position. We have also sold our SMM shares earlier on 11 September.


Disclaimer: We have expressed personal views below to record our thought process for our own investment decisions. They do not in any way represent recommendations for you to buy or sell any stock! Please do your own due diligence when it comes to investing.


1) What is Happening Next for SCI Shareholders

2) Implied Core Earnings, P/E, P/B and Dividend Yields for a *Demerged* SCI

3) Current Analyst Price Targets for SCI are above today’s close

4) SCI Price Charts – Support and Resistance Levels

5) What to do with SMM Shares?


srcset=https://i1.wp.com/theinvestquest.com/wp-content/uploads/smm-sci-chart.png?w=1138&ssl=1

The InvestQuest’s View: Our thesis remains intact and we believe that the *demerged” SCI provides good investment value. SCI shareholders will be receiving their entitled SMM shares on 11 Sept (Fri) and we expect to see high selling pressure on SMM then. Our view is that it’s important to either be first in the queue to sell SMM’s shares on Friday OR to wait several weeks to months for the share price to stabilize before selling. Long-term investors are likely at an upper hand here. For investors of the view that a Keppel-SMM corporate action is still on the table, the likely sell-off can provide a good opportunity to pick up SMM shares on the cheap.

For demerged SCI: We personally see the fair value for a demerged SCI at S$1.33, or 0.8x book value. We would be keen to add more exposure if share prices pull back to the mid-80 cents range.

For SMM: We personally see fair value at S$0.195, or 0.6x book value. We would be keen to add exposure if share prices pull back to S$0.13 (0.4x book value).


(OPTIONAL) Recap of Thesis

The implied value of Sembcorp Industries’ *demerged* business is cheap relative to peers. At the time of writing, the implied valuation is 4.3x – 5.7x core P/E for 2020/21 and 0.58x P/B, around half that of global peers in the same industry.

The reason for WHY value might potentially be created post demerger with Sembcorp Marine (SMM):

  • Removal of conglomerate discount
  • No longer dragged by SMM’s subpar performance
  • High stability of utilities business in Covid-era

1) What is Happening Next for Sembcorp Industries Shareholders

With the conclusion of the SMM rights issue and SCI/SMM demerger (see here for SGX annoucement), SCI shareholders will be entitled to 4.911 shares of SMM for every SCI share owned.

For SCI shareholders, the following dates are relevant to know:

  1. Cum-distribution trading of SCI shares: 8 September (Tuesday)
  2. Ex-distribution trading of SCI shares: 9 September (Wednesday), so don’t freak out if you see SCI share prices “fall” by 50%. It just means that any buyers of SCI on and after this date won’t be entitled to the SMM share distribution.
  3. Entitled SCI shareholders receive SMM shares for trading: 11 September (Friday). Similarly, since SCI shareholders will be receiving SMM shares in specie, this will probably mean high selling pressure for SMM.
srcset=https://i0.wp.com/theinvestquest.com/wp-content/uploads/smm-sci-chart-1.png?w=1138&ssl=1

2) Implied Core Earnings, P/E, P/B and Dividend Yields for a *Demerged* SCI

2A) What is the Implied Price of the *demerged* SCI? It’s S$0.962

The implied value of demerged SCI shares is as follows:

  1. Sembcorp Marine stake: S$0.948
    • For each share of SCI owned, SCI shareholders will be entitled to receive 4.911 shares of SMM, which has a market value of $0.193 per share (as of 8 September market close)
  2. Demerged Sembcorp Industries: S$0.962
    • SCI closed at S$1.91 on 8 September.
    • If you minus the SMM stake (S$0.948) from SCI’s current share price of S$1.91, this implies that the demerged SCI stub is being valued at S$0.962.

All this are ballpark figures since it depends on what the realizable value of SMM shares is on 11 Sept (Friday) and after. Do add a buffer if you want a greater margin of safety.  We wanted to calculate it anyway to get a sense of where the metrics lie.

2B) What is the implied core earnings and P/E ratio of the *demerged* SCI? Answer: Our estimate is S$300-S$400m and P/E of 4.3x – 5.7x

Core earnings for a “demerged” SCI (DSCI) has historically been relatively stable at around S$300-450 million per year (see table below). This figure excludes SMM’s profit contribution to SCI and exclude any one-off gains or impairments.

DSCI’s core earnings for 1H2020 remains steady at S$240 million (see table below). Despite SCI’s 1H2020 headline earnings being a disappointment at a $37 million loss, much of the losses were driven by SMM and one-off impairment losses.

srcset=https://i1.wp.com/theinvestquest.com/wp-content/uploads/DSCI-Core-Net-Profit-1.png?w=1424&ssl=1
Source: Bloomberg, SCI and SMM Annual & Interim Reports.

Assuming core earnings see a decline to a conservative S$300-400 million per year in the upcoming years, this implies an EPS for DSCI at S$0.168 – S$0.224, reflecting a core P/E ratio in the range of 4.3x – 5.7x. This is really cheap in our view for a defensive business and a discount to what DSCI has traded at previously.

srcset=https://i2.wp.com/theinvestquest.com/wp-content/uploads/DSCI-Historical-PE-1.png?w=1772&ssl=1
Source: Bloomberg and Sembcorp Industries Annual Reports. IQ Computations.
Note 1: For historical P/E, we use the implied market cap of the Demerged SCI (SCI’s market cap after subtracting the market value of its 61% stake in SMM). We then compare that market cap to the Demerged SCI’s earnings.

2C) What is the implied P/B of the *demerged* SCI? Our estimate is 0.58x

As of 30th June 2020, SCI’s book value is at S$3.19 per share. Upon the demerger, the demerged SCI’s book value is estimated to be at S$1.67.

Using the implied share price of S$0.962 for demerged SCI (from Section 2A), this would imply a P/B ratio of 0.58x. We show the historical P/B figures for DSCI in the chart below.

srcset=https://i0.wp.com/theinvestquest.com/wp-content/uploads/DSCI-Historical-PB.png?w=1168&ssl=1
Source: Bloomberg and Sembcorp Industries Annual Reports. IQ Computations.
Note 1: For historical P/B, we use the implied market cap of the Demerged SCI (SCI’s market cap after subtracting the market value of its 61% stake in SMM). We then compare that market cap to the Demerged SCI’s book value (which we calculated; the FY19 figure matches the pro forma book value in the demerger announcements)

Again, this is cheap especially when we compare it to regional peers (see table in Section 2E below).

2D) What is the expected dividend yield for *demerged* SCI? Our estimate is 4.4% for 2021

In view of the current challenging environment, SCI’s Board has decided to defer the dividend consideration to the full year. There is no interim dividend declared for 1H2020.

What should we expect for 2021? In the last 20 years, SCI’s dividend payout ratio has typically been in the 25-40% range. Excluding this year, the last time SCI’s payout ratio went below 35% was in 2004 (SCI paid out 19% of their earnings as dividends that year).

If we assume that dividend payout ratio is at a conservative 25%, and assuming core earnings is at S$300 million conservatively (see Section 2B above for how we got this figure), this would mean S$75 million of annual dividends paid out (or 4.2 cents per share). At the current implied market price of S$0.962, this implies a dividend yield of 4.4%.

2E) How would the implied P/E, P/B and Dividend Yield of *demerged* SCI compare to Global Peers?

Valuations of the demerged SCI also looks cheap relative to global peers (see table below). Valuation multiples and dividend yields shown for DSCI are based on the earlier-mentioned assumptions discussed in Section 2A-2D.

DSCI should trade at a discount to its peers in our opinion, due to the relatively larger EM exposure.

That said, a rerating to 0.8x P/B is possible, which implies a DSCI share price of S$1.33 (a 38% upside to DSCI’s current implied share price of $0.962, which we had computed in Section 2A).

srcset=https://i0.wp.com/theinvestquest.com/wp-content/uploads/DSCI-peer-comps.png?w=1422&ssl=1
Source: Bloomberg, IQ’s own computation, as of 8 September 2020.

3) Current Analyst Price Targets for SCI are above today’s close

We have listed the latest analyst price targets for SCI in the table below. 

Where available, we have also included the post-demerger target price. A number of these broker reports may be accessed from this sginvestors site, if you are keen to read in more detail.

SCI’s post-demerger analyst target prices of S$1.22-S$1.25 do provide a fair bit of upside potential to demerged SCI’s current implied price of S$0.962 (see Section 2A to see how this was derived).

srcset=https://i2.wp.com/theinvestquest.com/wp-content/uploads/SCI-ANR.png?w=1417&ssl=1
Source: Bloomberg, Reuters Eikon, retrieved as of 8 September 2020.

4) SCI Price Chart – Support and Resistance Levels

We plotted SCI price charts with Fibonacci retracements over the past two years below.

Textbook technical analysis suggests that we could see support at S$1.77 (or S$0.82 on 9 Sep onwards once we hit SCI’s ex-distribution date) and resistance at S$2.02 (or S$1.07 on 9 Sept onwards).

srcset=https://i2.wp.com/theinvestquest.com/wp-content/uploads/2yr-Fibo.png?w=1848&ssl=1
Source: Bloomberg, retrieved 8 September 2020.

5) What to do with SMM Shares?

SCI shareholders will be receiving their entitled SMM shares on 11 Sept (Fri) and we expect to see high selling pressure on SMM’s share price.

For investors of the view that a Keppel-SMM corporate action is still on the table, this can provide a good opportunity to pick up SMM shares on the cheap. Post-demerger, Temasek will directly own 42% of SMM (versus an indirect SMM stake of 30% prior the demerger/rights issue).

With the completion of SMM’s rights issue, SMM’s revised book value per share is now at S$0.325. That implies that SMM is trading at around 0.6x P/B now, in line with some of its peers (see table below). If there is a massive wave of selling pressure, we think a good entry level for SMM could be around S$0.13 (0.4x P/B).

srcset=https://i2.wp.com/theinvestquest.com/wp-content/uploads/SMM-comps-1.png?w=1423&ssl=1
Source: Bloomberg, and IQ computations. Retrieved as of 8 September 2020.

Most of the research analysts have target prices above SMM’s curent share price. We show the the ratings and target prices for some of the more recent broker updates below.

srcset=https://i0.wp.com/theinvestquest.com/wp-content/uploads/SMM-ANR.png?w=1417&ssl=1
Source: Bloomberg, Reuters Eikon, retrieved as of 8 September 2020.

The InvestQuest’s View: Our thesis remains intact and we believe that the *demerged” SCI provides good investment value. SCI shareholders will be receiving their entitled SMM shares on 11 Sept (Fri) and we expect to see high selling pressure on SMM then. Our view is that it’s important to either be first in the queue to sell SMM’s shares on Friday OR to wait several weeks to months for the share price to stabilize before selling. Long-term investors are likely at an upper hand here. For investors of the view that a Keppel-SMM corporate action is still on the table, the likely sell-off can provide a good opportunity to pick up SMM shares on the cheap.

For demerged SCI: We see the fair value for a demerged SCI at S$1.33, or 0.8x book value. We would be keen to add more exposure if share prices pull back to the mid-80 cents range.

For SMM: We see fair value at S$0.195, or 0.6x book value. We would be keen to add exposure if share prices pull back to S$0.13 (0.4x book value).

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