Brokers' Call: Sembcorp Industries

Sembcorp Industries | Buy

Fair value: $3.59

March 22 close: $3.09

Broker: OCBC Investment Research, March 22

With further liberalisation of Singapore's retail electricity market, there have been questions on the impact on utilities players such as Sembcorp Industries.

Sembcorp's Singapore energy business is broken down into three business lines: gas and power, merchant and retail, and renewables and environment.

Under gas and power, Sembcorp imports natural gas from Indonesia, which is supplied to major power generation and petrochemical companies. The group also has two gas-fired, co-generation plants on Jurong Island that provide power to the grid and steam to customers.

For merchant and retail, Sembcorp sells electricity to contestable customers, and with the liberalisation of the market, this pool will increase as more of the non-contestable segment becomes contestable, although at the same time the industry will become more competitive with the entrance of more retailers.

Under renewables and environment, Sembcorp provides water and wastewater treatment, has an energy-from-waste facility in Singapore and is looking to enhance its solar power capabilities. Retail electricity sales do not constitute a large part of the Singapore energy business. Sembcorp Power has reported net profit of $3.4 million to $4.4 million per year between 2014 and 2016, which is marginal compared with the group's total net profit.


OCBC Bank | Buy

Target Price: $14.95

March 22 close: $13.26

Broker: UOB Kay Hian, March 22

We are encouraged to see OCBC embarking on many IT initiatives to improve operating efficiency. It has set up an in-house unit with an initial investment of $10 million to develop artificial intelligence capabilities for wealth advisory and loan financing.

OCBC's retail customers are now able to perform day-to-day banking and make cashless payments using their voice. OCBC has also built two software programs utilising robotic process automation technologies for deployment in consumer secured lending and finance. OCBC's new regional data centre, purpose-built to prevent security breaches from cyber attacks, has been fully operational since the third quarter of last year.


GuocoLand | Add

Target Price: $2.88

March 20 close: $2.14

Broker: CGS-CIMB Securities, March 19

GuocoLand last Monday announced that it has, together with Intrepid Investments and Hong Realty, successfully tendered for the collective sale of the Pacific Mansion condominium site.

The deal follows the success of the nearby Martin Modern launch and underlines the developer's confidence and optimism on the Singapore private residential market outlook. In addition, it would extend GuocoLand's residential development income visibility. We think the project could likely be launch-ready only from 2019.

Assuming an average selling price of $2,700 psf, this project could add another four Singapore cents to GuocoLand's current revalued net asset value (RNAV) of $3.84.

We continue to like GuocoLand for its attractive valuations and high recurrent income base. The stock is trading at a 46 per cent discount to RNAV and offers 39 per cent upside to our target price of $2.88. A potential re-rating catalyst could come from rising average selling prices for its ongoing projects, while downside risk could be a slower-than-expected recovery in the Singapore office and residential markets.


City Developments | Buy

Target Price: $15

March 20 close: $13.45

Broker: RHB Research, March 20

As one of the largest residential landbank owners in Singapore, City Developments (CDL) remains the best proxy for investors looking to tap the residential segment's recovery. Its listed subsidiary Millennium & Copthorne's hotel operations are also poised to benefit from strong global economic growth aiding the hospitality sector.

CDL has a current unsold inventory of about 3,859 units, which makes it one of the developers with the highest unsold units. While it has been fairly aggressive in recent land bids, we believe its strong brand positioning and established track record should aid in its projects commanding premium prices.

Its recent preview of The Tapestry drew a strong response with more than 5,000 people visiting the show units during the launch on March 10. We understand that launch prices are expected to be around $1,300 psf, which translates into a healthy margin of more than 20 per cent.

A version of this article appeared in the print edition of The Straits Times on March 26, 2018, with the headline 'Brokers' Call'. Print Edition | Subscribe