Sembcorp Industries - CGS-CIMB Research 2020-02-21: Utilities Assets Are Almost Free

SEMBCORP INDUSTRIES LTD (SGX:U96)

Sembcorp Industries - Utilities Assets Are Almost Free

Excluding asset impairment previously guided, Sembcorp Industries (SGX:U96) posted an above-expectations 4Q19 core net profit of S$126m, thanks to S$87m urban development profit.
Non-op income likely to recur for India’s energy to meet management’s target of keeping it profitable, as seen in 4Q19 (S$46m profit, net one off:S$54m).

Covid-19 could have some impact on its Chinese utilities business (23% of utilities FY19 profit). Sembcorp Industries is an M&A play in the medium term. Maintain HOLD.

Sembcorp Industries (SGX:U96) reported a net loss of S$15m in 4Q19, hit by asset impairment of S$141m (guided earlier). FY19 reported net profit of S$247m missed Bloomberg consensus but beat our expectation of S$147m.
Sembcorp Industries declared a final DPS of S$0.03, bringing total DPS to S$0.05.
Despite the huge losses in Sembcorp Marine (SGX:S51), Sembcorp Industries’s core profit of S$126m was a beat, thanks to an S$87m profit (+625% q-o-q, +164% y-o-y) in urban development, above our expected S$54m. The division completed and handed over the Riverside Grandeur residential development in China. This momentum is unlikely to sustain in FY20F.
We forecast an FY20F net profit of c.S$86m. Energy profit of S$92m (+80% q-o-q, +42% y-o-y) was lifted by strong profits from India (S$46m), with some net non-operating income of c.S$54m.

Singapore’s 4Q19 energy profit plunged 95% q-o-q and 93% y-o-y to a record low of S$2m, affected by loss of income from the shutdown of power assets for maintenance, in addition to higher purchase cost from contract for differences (CFD) to fulfill customers’ demand.
Jurong Aromatics Corporation (JAC) utilities assets that were divested in 3Q19 also resulted in a loss of income of c.S$6m in 4Q19. The assets generated c.S$20m in profit in FY19.
We still forecast a stable y-o-y profit for Singapore of c.S$105m, expecting the gas optimisation strategy to remain in Singapore.

India turned in a surprisingly high 4Q19 profit of S$46m (+142% q-o-q) vs. the seasonal trend. There was c.S$54m of non-op. income (S$14m insurance claim for SEIL 1 shut down, S$10m interest recovery, S$17m reduction in tax, S$10m income on delayed start-up of SECI2). We expect non-op. income to recur to sustain India’s profitability.
Plant load factor (PLF) for SEIL 1 was strong at 90%, SEIL 2’s PLF dipped to 61%, affected by 31 days of maintenance while SGPL’s wind PLF at 19%. Spot prices for India in 4Q19 hovered at Rs2.84/Kwh (break-even level of Rs3.20/Kwh for SEIL2).

China profit of S$22m (-15% q-o-q, +29% y-o-y) was in line. Sembcorp Industries expects to see some drop in waste-water treatment and power demand.
UK posted a turnaround in profit in 4Q19 to S$26m (3Q19: loss of S$10m), in line with our expectations. Following the change in market in the flexible power segment, we now expect zero earnings contribution from UKPR. However the underlying operations at the Wilton site remain steady.
Rest of Southeast Asia posted a loss of S$2m (3Q19: S$6m profit), which was a miss as it included an inventory write-down for Phu MY 3, Vietnam as well as 17 days of shutdown in the Myanmar operations.

Energy business is trading at c.0.3x CY20F P/BV and we think upside risks are rofitability trend and the ability to unlock value in Sembcorp Marine.
See Sembcorp Share Price; Sembcorp Target Price; Sembcorp Analyst Reports; Sembcorp Dividend History; Sembcorp Announcements; Sembcorp Latest News.
Downside risks are negative implications from
1. prolonged unplanned plant shutdowns, and
2. unfavourable findings from SMM’s ongoing Brazil investigation.

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-02-21

SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.130 SAME 2.130