• Vietnam a beneficiary of trade tensions
• SCI has a long history there
• Monitoring SMM’s capex, WC needs

Impact of US-CH Trade Tensions

As trade tensions between the US and China intensify, investors have been wondering about the impact on their investments. For Sembcorp Industries (SCI), the direct impact is not significant, given that it provides utilities, water and waste management and power services which are essential in nature.

There is, however, a positive indirect impact as SCI, having expertise in the development of industrial parks, is well-placed to benefit from more company relocations from China to peripheral economies like Vietnam. There will also be higher electricity growth as Vietnam’s economy expands. This is the same for Thailand, though SCI has no significant presence there.

Long History in Vietnam

SCI has a long history in Vietnam, as the first Vietnam-Singapore Industrial Park (VSIP) celebrated its 20th anniversary just a few years ago. Ever since, more VSIPs have been completed and it was announced in 2017 that SCI is eyeing an eighth industrial park in the country.

Indeed, SCI has been seeing a growing demand in industrial land, with sales and new commitments increasing in 2018 as the VSIP projects benefitted from a trend in which companies are looking to diversify their manufacturing bases.

Vietnam is well-placed to benefit due to its competitive labour market, tax incentives and improved access to other markets given its multiple trade agreements.

Monitoring SMM’s Capex and Working Capital Needs

On the other hand, the market has been monitoring Sembcorp Marine’s capital expenditure and working capital needs, which would also depend on the new orders that come in. As at 1Q19, net gearing was 1.47x for SMM and about 1.1x for SCI. For SCI, the group is about halfway in its capital recycling programme.

Since the start of 2018, SCI has unlocked cash proceeds of about S$220m, which is more than 40% of the S$500m divestments it is targeting to achieve by 2020. We recently lowered our fair value estimate for SMM to S$1.60, and our sumof-parts based fair value estimate for SCI drops correspondingly from S$3.13 to S$3.03.

Source: OCBC Research - 4 Jun 2019