‘Buying opportunity’: Sembcorp’s India unit IPO could lift group value by up to 10%

[SINGAPORE] The completion of Sembcorp Industries’ planned initial public offering of its Indian renewable energy unit could prompt a rerating of the Singapore-listed parent, with at least one analyst forecasting up to 10 per cent upside for the group’s valuation.

The planned IPO of Sembcorp Green Infra (SGI), which filed its draft red herring prospectus in India on Thursday (Aug 27), could also make Sembcorp more attractive to investors, said CGS International (CGSI) analysts Meghana Kande and Lim Siew Khee in a note on Friday.

This is especially for those seeking a “fundamental non-index pick” once Sembcorp is removed from the MSCI Singapore Index on Aug 31.

SGI is seeking to raise up to 37.5 billion rupees (US$390 million), with about 80 per cent of the proceeds to be used to pay debt.

Analysts noted that Sembcorp’s India business is currently undervalued relative to its potential.

CGSI analysts said the market currently values SGI at about nine times its estimated 2028 operating earnings, below the 13 times valuation of its renewable energy peers.

“We believe the IPO could establish a market-based valuation for SGI and drive a rerating of Sembcorp industries’ sum-of-parts,” said the analysts.

CGSI estimated the Indian business to be valued at around S$5 billion to S$6.7 billion, before debt repayment, equivalent to about 14 to 18 times its estimated 2028 operating earnings.

The analysts said this valuation is “decent” compared with those of its Indian renewable energy peers.

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Higher valuation than peers

Meanwhile, DBS on Friday estimated that SGI could be worth about S$5.5 billion to S$6.1 billion. This is based on estimated operating earnings of around S$500 million to S$550 million, and a conservative valuation of 11 times its operating earnings.

The analysts said the India unit’s size, strong pipeline of projects, profitability and focus on renewable energy could justify a higher valuation than more diversified utility companies.

DBS analyst Ho Pei Hwa expects SGI’s net debt to rise from S$1.6 billion currently to S$4 billion as the company takes on more debt to fund its projects.

This would imply about S$1.5 billion to S$2.1 billion in equity value, suggesting a 5 to 10 per cent upside to Sembcorp’s overall group valuation.

However, analysts remain optimistic about the company’s fundamentals. DBS maintained a “buy” with a target price of S$7.30, suggesting that any near-term selling pressure from the MSCI deletion should be viewed as a “buying opportunity”.

CGSI also reiterated its “add”, keeping its target price at S$7.15 based on the potential sum-of-the-parts rerating and a dividend yield of around 6 per cent.

Sembcorp Industries closed 1.3 per cent or S$0.08 lower at S$6.01 on Friday.