Sembcorp Industries - CGS-CIMB Research 2019-12-09: Bombed-out Stock

SEMBCORP INDUSTRIES LTD (SGX:U96)

Sembcorp Industries - Bombed-out Stock

SEMBCORP INDUSTRIES (SGX:U96) is trading at 0.6x CY19F P/BV or its 10-year trough, dragged by the unpredictability of its India energy arm and heavy-laden Sembcorp Marine (SGX:S51).
Sembcorp Industries’ longer-term strategy in Sembcorp Marine and consistent quarterly profit from India are key catalysts.
Maintain ADD and Target Price of S$2.78 on SOP valuations.

Despite severe losses at Sembcorp Marine, Sembcorp Industries has been generating profits as a group, lifted by the energy division, which had beaten our expectations over the past two quarters (2Q- 3Q19). In the latest 3Q19 earnings, profit from energy was S$84m (-9% q-o-q, -17% y-o-y) helped by a S$15m vendor settlement pursuant to the delayed start-up of its Myanmar plant.
We believe investors could have grouses about the unpredictability of provisions/write-backs within the energy division.

Sembcorp Industries has shown good progress in delivering consistent profits of c.S$30m/per quarter in the past one year. This is on the back of its strategy of gas position optimisation. As most of the integrated utilities plants in Singapore were built in the early 2000s, some of the plants are operating less efficiently.
We believe the industry could see some capacity shut-down of less efficient plants, including Sembcorp Industries’. This could help to improve the oversupply situation in Singapore in general.

India’s quarterly profits could swing due to seasonality but, on a full-year basis, it should be profitable in FY19-21F. SEIL 1 should remain steady with core net profit of S$10m- 12m/quarter on consistent PLF of above 85%.
Going into FY20F, we expect to see some settlement of claims for the previous turbine issue in 4Q18-2Q19. SEIL 2’s profits may still be volatile without a long-term PPA and given its correlation with coal prices.
We believe that, over the longer term, the plan to monetise its Indian business is still on track with the objective of recycling capital into renewables or other markets.

Sembcorp Industries has a gross installed capacity of 2,621MW for renewable energy, of which 92% is wind-powered in India and China. In 2018, renewable energy contributed S$63m to profits, up from S$17m in 2016. The group plans to grow its renewable capacity to 4,000MW by 2022.
In recent years, Sembcorp Industries has become a leading solar power provider in Singapore, with about 169MW gross installed capacity.

The success of Temasek’s partial offer for Keppel Corporation (SGX:BN4) could pave the way for restructuring between Sembcorp Industries and Sembcorp Marine. We think Sembcorp Industries and Keppel Corporation could dilute their stakes in O&M and Sembcorp Marine via dividends in specie to allow better value to be extracted from Sembcorp Industries’ energy business.
In the longer term, we think there is synergy from asset-swapping Keppel Corporation’s infrastructure business with Sembcorp Industries’s urban development.
See Sembcorp Share Price; Sembcorp Target Price; Sembcorp Analyst Reports; Sembcorp Dividend History; Sembcorp Announcements; Sembcorp Latest News.

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2019-12-09

SGX Stock Analyst Report ADD MAINTAIN ADD 2.780 SAME 2.780