Sembcorp Industries - DBS Research 2020-02-24: Waiting For Recovery


Sembcorp Industries - Waiting For Recovery

  • Sembcorp Industries's 4Q19 core earnings grew 17% y-o-y boosted by Riverside Grandeur property sales recognition.
  • Declared 3 Scts final dividend; implied dividend yield of 2.5%.
  • Earnings recovery of Energy businesses in India/UK and Marine segments are key; restructuring a wild card.
  • Maintain HOLD; Target Price S$2.20.

4Q19 impairment mitigated by other gains and property profits

  • As guided in the profit warning on 6 Feb, Sembcorp Industries (SGX:U96) swung into net loss of S$15m in 4Q19. This led to FY19 headline profit falling by 29% y-o-y to S$247m.
  • Stripping out exceptional items, Sembcorp Industries’s FY19 core profit would have grown 17% y-o-y to S$395m.

Energy segment incurred net exceptional loss of S$165m.

  • Impairment and provisions totalled S$251m comprising:
    1. S$158m impairment on UK Power Reserve (UKPR);
    2. S$64m impairment arising from the divestment of its water business in Chile;
    3. S$23m impairment for its wastewater treatment assets in China; and
    4. S$6m provisions; partially offset by divestment gains of S$86m from a land lease sale by the UK Energy business and disposal of utilities assets formerly serving Jurong Aromatics Corporation (JAC) in Singapore.
  • In addition,, India operations received insurance claims and settlements of S$44m in 4Q19, which helped to cushion the impairment impact. This is considered as part of the core earnings, lifting India’s FY19 headline profit to S$100m.
  • Excluding the one-offs, core profits for India was S$32m. Management is optimistic that the recovery trend in India is sustainable.
  • UK Power Reserves (UKPR) churned profit of S$11m in 4Q19, boosted by capacity payment of ~S$20m. The business broke even with ~S$1m profit in FY19. Management expects a similar profit level this year.
  • Overall, Energy segment reported a 38% decline in net profit to S$195m for FY19. Excluding exceptionals, net profit would have risen 12% y-o-y to S$360m.

Urban made record profit of S$117m (+36% y-o-y)

  • Urban made record profit of S$117m (+36% y-o-y) in FY19, boosted by profit recognition from completion of residential development Riverside Grandeur in Nanjing China, which we estimate to be ~S$70m. Sembcorp Industries continues to develop new residential projects; expects recognition of The Habitat Phase 2 (launched and sold out in 2019; 3A soft-launched in Oct- 2019) and Sun Casa in 2020.
  • Sembcorp Industries has net orderbook comprising 423 ha (similar to end FY18) to be recognised as land sales over the next 2-3 years.

Marine business remains weak.

  • Sembcorp Marine (SGX:S51) reported S$77.7m loss (Sembcorp Industries’s share ~S$47m) in 4Q19, worse than S$52.6m loss a quarter ago, and our / market expectations of ~S$30m loss.
  • Core “gross margin” of -11.6% (vs -6.4% a quarter ago) was probably the worst we have seen in 20 years. Management attributed this to higher overhead costs for the new projects secured in 4Q19 and net cost accruals for ongoing projects. The huge losses in 2H resulted in FY19 net loss of S$137.2m (Sembcorp Industries’s share ~S$85m), which was nearly double FY18’s net loss of S$74m.
  • Sembcorp Marine’s loss-making trend is expected to continue in 2020, though we believe it will likely narrow on the back of cost savings from the return of Tanjong Kling yard end 2019.

Earnings revisions.

Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2020-02-24
SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.200 SAME 2.200