Sembcorp Industries - RHB Invest 2020-02-24: Value After Recent Share Price Weakness; BUY

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SEMBCORP INDUSTRIES LTD (SGX:U96)

Sembcorp Industries - Value After Recent Share Price Weakness; BUY

• Keep BUY with new SOP-derived SGD2.33 Target Price from SGD2.68, 16% upside plus c.2% yield.
• Sembcorp Industries (SGX:U96)'s FY19 net profit of SGD247m came in ahead of our SGD187m expectations. Excluding the one-time exceptional items, recurring FY19 net profit of SGD395m would be 17% higher y-o-y.
• We remain positive on Sembcorp Industries with expectations of its energy and urban segments underpinning performance going forward.

Energy segment accounted for 91% share of recurring net profit.

• Excluding exceptionals, the energy segment’s FY19 recurring net profit was SGD360m (+12% y-o-y), driven by better overseas performance.
• Urban is a growing segment, accounting for another 30% recurring earnings share – with profit recognition from the property development Riverside Grandeur in Nanjing, China. Its marine segment incurred a recurring loss of SGD88m.
• China is the largest contributor to FY19 energy recurring net profit, with a 29% share, with growth driven by renewable assets. China has overtaken Singapore, the leader in FY18. Singapore’s weak performance was due to its planned 4Q19 major maintenance of power generation assets.
• India is the third largest contributor with a 28% share, after doubling its recurring net profit y-o-y. The SEIL Thermal Project 1 (P1) contributed to FY19 profit from operations of SGD213m, up 24% y-o-y.

Urban’s healthy orderbook to underpin future earnings.

• In FY19, urban development completed and handed over Sembcorp Industries’s wholly-owned Riverside Grandeur residential development. Orderbook from Vietnam remained robust. Looking ahead, net orderbook of 423ha is to be recognised as land sales over the next 2-3 years.

Marine segment has total net orderbook of SGD2.4bn as at Dec 2019.

• However, weak revenue was contributed by the marine segment’s losses incurred in FY19. Sembcorp Marine (SGX:S51) (BUY, Target Price: SGD1.45, see report: Sembcorp Marine - RHB Invest 2020-02-20: Higher FY19 New Orders, Expecting FY20 Losses), which is 61% owned by Sembcorp Industries, had earlier guided for continued losses to be incurred in FY20. We forecast Sembcorp Marine to turn profitable in FY21.

We forecast respectable FY20 earnings.

• We cut FY20F net profit by 14% to SGD404m, as management guided a competitive energy business environment in Singapore and India’s 2020 energy performance to be flat y-o-y. Although we also cut FY21F net profit by 14%, net profit growth should be a respectable 10%.
• Our Target Price is SGD2.33, based on SOP valuation. The bulk of the value is derived from the energy business (56% share), with subsidiary Sembcorp Marine taking another significant 34% share. A 25% conglomerate discount is also factored in. Our Target Price implies FY20F P/E of c.10x, which is below the 5-year historical average of 13.4x.
• See Sembcorp Share Price; Sembcorp Target Price; Sembcorp Analyst Reports; Sembcorp Dividend History; Sembcorp Announcements; Sembcorp Latest News.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-02-24

SGX Stock Analyst Report BUY MAINTAIN BUY 2.33 DOWN 2.680