SEMBCORP INDUSTRIES LTD (SGX:U96)
Sembcorp Industries - Waiting To Be Rescued
- Sembcorp Industries (SGX:U96) gave an update on the impact of Covid-19. Its merchant operations in Singapore, UK and India have seen energy demand decline 10-25% in Apr.
- Energy unit will recognise EI losses in FY20 -- S$30m forex loss from divestment of Chilean water assets, and c.S$37m of MTM losses in gasoil.
- Maintain HOLD in view of Sembcorp Industries's restructuring angle and high likelihood of another business review with its new CEO in Jul. Our Target Price is cut to S$1.76.
Lower demand and prices for energy
- Sembcorp Industries today provided a brief update on the impact of Covid-19 on its operations. It said the reduced economic activity due to lockdowns in multiple markets resulted in a decrease in energy demand and prices. Its merchant operations in Singapore, India and the UK have seen power demand decline by 10-25% y-o-y in Apr. Sembcorp Industries expects this downtrend to persist over the rest of 2020.
- The underlying performance of its energy business in FY20F will be markedly lower than in FY19. Sembcorp Industries guided for some EI losses to be recognised in FY20F, including
- c.S$30m of currency translation loss with the completion of the divestment of its water business in Chile,
- c.S$45m pre-tax reduction in book value (c.S$37m net of tax) on the required regulatory inventory of its gasoil reserves in Singapore.
India: SEIL 1 strong utilisation, but SEIL sub-optimal
- We believe Sembcorp Industries's India arm could post slight losses for 1Q20F unless there were reversal of provisions during the quarter due to the sub-optimal performance of SEIL 2. Our check found that average utilisation in Jan-Apr was 88% for SEIL 1 but 47% for SEIL 2. Spot power prices were 6% lower q-o-q at c.Rs2.66/kwh; we believe this could have widened SEIL 2's losses during the quarter. Wind power is also typically weaker in 1Q for SEIL 2.
Urban land take-up depends on speed of economy reopening
- The pace of land and property sales for Sembcorp Industries's urban business has been affected by the Covid-19 led delays in regulatory and other approvals required for its projects. Sembcorp Industries guided that uncertain economic outlook could lead to lower take-up and demand, or delayed launches for some of the unit’s integrated developments and properties.
Factoring in positive operating cashflow
- We think Middle East could be the only stable market for Sembcorp Industries in FY20F while most other merchant markets (Singapore, India and UK) could see 20-50% decline in y-o-y earnings. We project energy core profit to decline 25% in FY20F (-42% including EI losses).
- Together with our recent EPS cut for Sembcorp Marine (see report: Sembcorp Marine - CIMB Research 2020-05-13: Double Whammy), we cut our FY20-22F EPS for Sembcorp Industries by 15- 40%.
- On a positive note, Sembcorp Industries expects to keep a positive operating cash flow in FY20F.
Waiting to be restructured
- Our SOP-based Target Price declines to S$1.76 to reflect the earnings cut and our revised Target Price for Sembcorp Marine. Sembcorp Industries is trading at a new trough of 0.4x FY20F P/BV.
- See Sembcorp Share Price; Sembcorp Target Price; Sembcorp Analyst Reports; Sembcorp Dividend History; Sembcorp Announcements; Sembcorp Latest News.
- Upside risks: restructuring with Sembcorp Marine/Keppel Corp (SGX:BN4) and new business direction from CEO.
- Downside risk: asset impairments.
LIM Siew Khee
CGS-CIMB Research
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https://www.cgs-cimb.com
2020-05-18
SGX Stock
Analyst Report
1.76
DOWN
2.13
