Sembcorp Industries - RHB Invest 2019-09-18: Energy Business To Boost Earnings; BUY


Sembcorp Industries - Energy Business To Boost Earnings; BUY

Management expects the energy and urban businesses to underpin overall 2H19 performance.

  • The energy business contributed 1H19 net profit of SGD177m (+14% y-o-y), or 93% of Sembcorp Industries’ overall net profit. On the other hand, it remained challenging for the offshore & marine segment, with Sembcorp Marine guiding for FY19 losses.

Positive on India power market outlook.

  • Sembcorp Industries’ India power business accounted for 18% of overall group profit. It will benefit from India’s expected power deficit from 2020, a consequence of rising power demand and insufficient new India thermal power plant capacity – particularly in Andhra Pradesh.
  • In the near term, the phased commissioning of 200MW out of 550MW for Solar Energy Corp of India (SECI) 2 and SECI 3 wind power projects is a positive.

Sembcorp Marine is hopeful of securing new orders.

  • As insufficient new orders were secured over the last few quarters, Sembcorp Marine guided for 2H19 losses to be higher than 1H19’s, with FY19 losses projected to be in a similar range to FY18’s losses. We forecast the firm’s FY19 net loss of SGD67m.
  • In early September, Sembcorp Marine announced that it had secured new projects totalling SGD400m, bringing YTD new orders to SGD575m – in line with our FY19 assumption of SGD1bn. We forecast new orders of SGD2.5bn in FY20 for the firm.

Urban earnings to continue in 2H19.

  • Urban business accounted for 9% of 1H19 group net profit. Subsequent 2H19 earnings should be well supported by strong Vietnam orderbook and expected recognition of income from the sale of residential development in China.

Our TP is SGD2.68, based on SOP valuation.

  • The bulk of the value is derived from the energy business (59% share), with subsidiary Sembcorp Marine taking another significant 35% share.
  • A 20% conglomerate discount is also factored in. This SGD2.68 Target Price implies a FY20F P/E of 9.9x, c.1SD below the 5-year historical average of 13.4x.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-09-18
SGX Stock Analyst Report BUY UPGRADE NEUTRAL 2.68 DOWN 3.200