Sembcorp Industries - CGS-CIMB Research 2020-05-18: Waiting To Be Rescued


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

Waiting to be restructured

LIM Siew Khee CGS-CIMB Research | 2020-05-18
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.76 DOWN 2.13