Sembcorp Industries - DBS Research 2019-11-18: A Safer O&M Proxy


Sembcorp Industries - A Safer O&M Proxy

  • Sembcorp Industries' 3Q19 dragged by bigger marine losses; India operations hit by lower tariff.
  • Non-marine business unwarrantedly penalised for marine exposure.
  • Potential Keppel-Sembcorp Industries restructuring; spin-off of marine arm could re-rate non-marine business.
  • Maintain BUY; Target Price S$2.90.

Maintain BUY; Target Price S$2.90.

  • SEMBCORP INDUSTRIES (SGX:U96) offers a unique value proposition as a defensive utilities business, and as a proxy to ride the cyclical O&M recovery. Stripping out Marine’s current valuation, its Energy business is deeply undervalued at 0.6x P/BV and 6x PE against 6-7% ROE. In fact, the stock is trading at only 10% premium to our ~S$2 fair value of Sembcorp Industries’s businesses excluding Marine, implying its marine business comes almost free. See Sembcorp Share PriceSembcorp Target Price.
  • Emerging markets are the long-term growth engines. Sembcorp Industries’s India operations swung from a loss of S$58m in 2017 to a profit of S$47m in 2018, and the positive trend should continue. The power market in India is recovering with current peak surplus expected to reverse by FY20, according to independent research house CRISIL, driving up tariffs.
  • Besides India, Sembcorp Industries has also made forays into other emerging markets – Bangladesh, Vietnam and Myanmar.

3Q19 results dragged by Marine segment

Sembcorp Marine reported net losses of S$52.6m (Sembcorp Industries’s share ~S$32m) in 3Q19, worse than our expectations of ~S$30m loss.

  • Quarterly losses widened from ~S$8.5m a quarter ago despite a similar revenue level of S$717.2m (-8% y-o-y; -1% q-o-q). Core “gross margin” of -6.4% is probably one of the worst we have seen in 20-years. Management attributes this to more prudent margin recognition and higher cost accruals, especially for the rigs and floaters as well as first-time projects. The big losses bring 9M19 net losses to S$59.5m.
  • We lowered our margin assumption by ~2ppts for FY19/20. Our earnings forecasts for Sembcorp Marine are thus cut from - S$54m/+S$27m to -S$89m/-S$4m for FY19/20. Earnings growth in 2020 should be predominantly lifted by the absence of a S$48m accelerated depreciation. As a result, our FY19/20F earnings forecasts for Sembcorp Industries are reduced by 6%/5%.
  • See Sembcorp Marine Share PriceSembcorp Marine Target Price.

Energy business broadly in line.

  • Energy segment’s net profit in 3Q19 drop ~12% q-o-q to S$81m as SEIL plant 2 swung back into losses, partially offset by better performance in Rest of Asia.

India operation affected by lower tariff and higher hydro generation.

  • India operation’s core profit fell 24% to S$19m, from S$24m (excluding S$17m recognition of settlement with customer on late payment). SEIL plant 2 swung back from a S$1m profit a quarter ago to a S$16m loss due to lower tariff, less short-term contract sales and higher hydro generation during the monsoon season. This was partially offset by higher SGI renewable profits of S$25m in seasonally strongest 3Q.

Urban segment generated profit of S$12m, similar to 2Q19, largely from Vietnam industrial land sales.

  • Land sales tend to be lumpy and we expect momentum to pick up as the property market continues to improve in China. Healthy net orderbook of 455 ha would be recognised as land sales over next 2-3 years. In addition, we will also see recognition of income from the sale of Riverside Grandeur in 4Q19.

Where we differ:

  • We believe in the long-term growth prospects of Sembcorp Industries’s Energy arm, which has expanded its global footprint into key emerging markets – India, Bangladesh, Vietnam, and Myanmar. We hold on to our belief of a potential merger between Keppel’s O&M arm and Sembcorp Marine in view of keener competition in the sector.
  • We believe a spin-off of its marine arm could re-rate Sembcorp Industries’s undervalued utilities business that is being overshadowed by the cyclical marine business.

Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2019-11-18
SGX Stock Analyst Report BUY MAINTAIN BUY 2.900 SAME 2.900