SINGAPORE (May 4): DBS is maintaining its “buy” call on Sembcorp Industries with a target price of S$3.80 even as the group orders a strategic review of its businesses.

Under the helm of the new CEO Neil McGregor, SCI will be undertaking a complete review of businesses and strategic direction, focusing on performance, sustainability and value creation.

The outcome of the review is expected to be revealed and implemented in six months’ time.

While it is premature to shed more light on the future direction of SCI, it might revive market speculation on potential rationalisation of the three home-grown industrial plays, namely SCI, Sembcorp Marine (SMM) and Keppel Corporation (Keppel), says DBS in its Thursday report.

Since Aug 2015, DBS has flagged the potential merger between Keppel’s O&M arm and SMM during the structural downturn.

The spin-off of its marine arm could re-rate SCI’s undervalued utilities business that is currently overshadowed by the weak marine outlook.

“We believe in the long-term growth prospects of SCI’s utilities arm, which has expanded its global footprint and recently made forays into key emerging markets – India, Bangladesh and Myanmar,” says analyst Ho Pei Hwa.

Given its diverse earnings stream and various listed assets, DBS says it derived its fair value for SCI based on the sum of its different parts.

Market valuations of its stakes in listed companies Sembcorp Marine (SGX-listed, 60.6% stake), Gallant Venture (SGX-listed, 11.96% stake) and Salalah (Muscat stock exchange, 40% stake) and earnings from utilities and urban development were taken into consideration.

For its holding company position, DBS has applied a 10% conglomerate discount to the reappraised net asset value (RNAV).

“We derive a TP of S$3.80, translating to 1.0x P/BV,” says Ho.

Shares of SCI are up 10 Singapore cents this morning to S$3.10.