Sembcorp Industries - OCBC Investment 2019-05-16: Repositioning Underway


Sembcorp Industries - Repositioning Underway

  • Renames Utilities to Energy.
  • Indirect impact from trade war.
  • To continue capital recycling efforts.

SCI's 1Q19 results in line

  • SEMBCORP INDUSTRIES LTD (SGX:U96) registered a 10% y-o-y rise in revenue to S$2.5b and a 21% growth in net profit to S$93m in 1Q19, such that the latter represented 22% of ours and the street’s full year forecast.
  • In line with its strategy to reposition as an integrated energy player, Sembcorp Industries has renamed its utilities segment “Energy”.
  • Out of the S$93m net profit in 1Q, Energy contributed S$85m, Urban accounted for S$7m with the balance S$1m from “Others” (mainly relates to minting and design and construction activities). Marine’s contribution was minimal.

21% growth in Energy net profit in 1Q

  • In 1Q19, Sembcorp's energy business performed well, with net profit growing 21% to S$85m, underpinned by better performance in India and the recognition of peak winter availability payments for UK power reserve.
  • The Sembcorp Myingyan independent power plant in Myanmar which fully commenced commercial operations in 2018 was also officially opened in Mar this year. This is the first competitively tendered IPP in the country and also the first with integrated solar power generation.

Impact of US-CH trade tensions

  • The direct impact of US-China trade tensions is not significant for Sembcorp Industries, 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 Sembcorp Industries, 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 Sembcorp Industries has no significant presence there.

About halfway in its capital recycling programme

  • Meantime, Sembcorp Industries is continuing with its capital recycling efforts. Since the start of 2018, Sembcorp Industries 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.
  • Looking ahead, the Energy and Urban businesses are expected to continue to underpin Sembcorp’s performance, but the market environment remains challenging for the offshore and marine sector.
  • We tweak our assumptions and our sum-of-parts based fair value estimate slips from S$3.30 to S$3.13.
  • Maintain BUY.

Low Pei Han CFA OCBC Investment Research | 2019-05-16
SGX Stock Analyst Report BUY MAINTAIN BUY 3.13 DOWN 3.300