Broker's take: DBS says Sembcorp 'too cheap to ignore', upgrades to 'buy'

DBS Group Research has upgraded Sembcorp Industries (SCI) to "buy" from "hold" with an unchanged target price of S$1.70.

SCI shares were trading S$0.06 or 4.4 per cent higher at S$1.42 as at 1.50pm on Monday.

The sell-off in SCI shares was likely due to the company's recent removal from the MSCI Index, said the research team in a note on Monday. DBS analyst Ho Pei Hwa also called SCI "too cheap to ignore".

The sell-off had pushed SCI's valuation to an "unwarranted low". Ms Ho added that there is 25 per cent potential upside on the stock.

SCI's earnings are expected to remain in positive territory with mid-single-digit return on equity (ROE), the note added.

While subsidiary Sembcorp Marine's (Sembmarine) ROE has deteriorated from a peak of greater than 30 per cent before the global financial crisis to be loss-making in recent years, the non-marine business should continue to deliver steady ROE at around the mid-to-high single digits.

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Spinning off the group's marine arm could result in the re-rating of SCI's undervalued utilities business by at least 30 per cent or 40 Singapore cents per share, the report noted.

Potential restructuring between SCI and Keppel Corp also remains a wild card, with largest stakeholder Temasek's partial offer for Keppel seemingly progressing well, Ms Ho said.

Sembmarine shares were trading S$0.01 or 1.5 per cent higher at S$0.69 as at 1.50pm on Monday.