Sembcorp Industries - UOB Kay Hian 2019-11-18: 3Q19 Weak Marine Results Overshadow Some Positives

SEMBCORP INDUSTRIES LTD (SGX:U96) | SGinvestors.io SEMBCORP INDUSTRIES LTD (SGX:U96)

Sembcorp Industries - 3Q19 Weak Marine Results Overshadow Some Positives

  • SEMBCORP INDUSTRIES (SGX:U96) reported a 19% y-o-y decline in revenue to S$2.45b while NPAT fell by 13% y-o-y to S$71m. See Sembcorp Announcements. On a 9M19 basis, the company’s revenue and NPAT made up 71% and 69% of our full-year estimates.
  • While the energy and urban businesses did well with group profit from operations rising 3% and 20% respectively, they were not able to offset the weak marine earnings.
  • Downgrade 2019-21F earnings by 3-11%. Maintain HOLD with a lower target price of S$2.19.
  • Entry price: S$2.00.



3Q19 RESULTS

  • Energy segment a mixed bag. While Sembcorp Industries saw a 8% y-o-y improvement in profit from operations for 9M19, due to new power assets in Bangladesh, Myanmar and additional renewable capacity in China, Singapore saw a y-o-y decline due to higher Open Electricity Market expenses, offset by a one-off $21m gain from the sale of excess strategic fuel and pipeline construction.
  • India struggled in 3Q19 with energy net profit slumping 34% y-o-y to S$19m – this was due to lower dark spreads as well as lower demand for thermal power given that heavy monsoon rains led to stronger hydroelectic power production.
  • Unfortunately, poor performance from the marine segment overshadowed with its net loss widening by 32% y-o-y to S$50m (Sembcorp Industries’ share of marine’s loss) in 9M19 (3Q18: loss of S$38m).


STOCK IMPACT

  • Divestment target has been met, but capital recycling efforts will continue. The company stated that while its divestment target has been met, it continues to re-examine its total portfolio with the intention of further rationalisation. In particular, management commented that it is looking to slim down the number of geographies that Sembcorp Industries operates in, thus resulting in its portfolio becoming more concentrated in Singapore, Southeast Asia and the UK. We note that India was not mentioned given that Sembcorp Industries – potentially because it is planning for an IPO to unlock value, with the timing of any IPO very much dependent on local market conditions.
  • Strong free cash flow. On a positive note, the company generated strong free cash flow of S$934m in 9M19, doubling the S$461m recorded in 3Q18. This was attributable to stronger cash flow from operating activities, lower working capital changes and capex spending, as well as higher divestment gains.
  • Balance sheet – Not comfortable yet. As at 30 Sep 19, the company had gross debt of S$10.7b of which c.25% is related to SEMBCORP MARINE (SGX:S51), 34% project finance debt and 41% corporate debt. Including cash of S$1.7b, the company’s net debt equated to S$9.04b, or 1.14x net debt to equity..


EARNINGS REVISION/RISK

  • We have lowered our 2019-21F earnings by 3-11% to take into account slower revenue and operating profit growth in energy (primarily due to Singapore and India) as well as lower profit margins at the energy segment.


VALUATION/RECOMMENDATION



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Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-11-18
SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.19 DOWN 2.220



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