• Outcome of strategic review by 4Q17
• Closed at recent low of S$2.94 on Mon
• Upgrade to BUY

Strategic Review- 1) Capitalizing on the Downturn and 2) Unlocking Value?

SCI’s management is currently in the process of undertaking a strategic review of the group’s businesses, and this is expected to be completed by 4Q17. There can be various scenarios which can happen, but we also note management’s comment in last quarter’s results briefing that while it seeks to take a prudent approach in whatever it does, it also wants to be agile and capture opportunities when the market recovers. As such, some of the possible outcomes include the divestment or privatisation of Sembcorp Marine.

For the funding of the latter, divestments of non-core assets could help to shore up capital, and this could include Sembcorp Design and Construction, as well as Singapore MINT. There could also be divestments of certain utilities assets in more mature markets where the projected rate of growth is lower than assets in emerging markets.

Keeping a Close Eye on the Balance Sheet

At the same time, we note that SCI has also reduced its interim dividend from S$0.04/share last year to S$0.03/share in 1H17, as the group seeks to be prudent and conserve cash for now. In general, we get the sense that management is keeping a close eye on its balance sheet where its net gearing has increased from 0.42x in 2014, 0.65x in 2015, 0.9x in 2016 and finally to 0.96x as at 1H17, mainly due to higher debt load in the Marine business, as well as project finance debt from the power plants in India.

Upgrade to BUY

That said, whatever the results of the strategic review, we believe it will be done in the interests of shareholders. Meanwhile, since we downgraded our rating to Hold on 4 Aug, SCI’s share price has corrected by 7.2% compared to the STI’s 2.4% drop. The stock also closed at a recent low of S$2.94 on Monday. With the price correction, we now see a 15% upside (excl. dividends) from our fair value estimate of S$3.43 and upgrade our rating to BUY.

Source: OCBC Research - 23 Aug 2017