SEMBCORP INDUSTRIES LTD (SGX:U96)
Sembcorp Industries - Energy Business Affected By COVID-19
- In a recent Sembcorp Industries update, management indicated that its FY20 energy business underlying performance would be lower than in FY19.
- While we cut FY20F earnings, Sembcorp's recent share price weakness has already factored in the negatives.
- Keep BUY, with new SOP-derived SGD2.00 Target Price from SGD2.33, 29% upside and c.3% yield.
Lockdowns in multiple markets have reduced energy demand and prices.
- In particular, lower energy demand and prices will impact Sembcorp Industries (SGX:U96)’s merchant operations in Singapore, India and the UK, which saw power demand in Apr 2020 decline by approximately 10% to 25% y-o-y. Sembcorp Industries guides for the FY20 underlying performance of the energy business to be markedly lower than in 2019.
- Management said the Sembcorp Industries's FY20 energy business net profit will be adversely affected by:
- Currency translation loss recognised in the foreign currency translation reserve for the divestment of the water business in Chile. As at 31 Dec 2019, the accumulated currency translation loss was SGD30m. Completion of the transaction is expected by 3Q20.
- The decline in energy prices, which has significantly reduced the net realisable value (NRV) of the inventory of gasoil reserves in Singapore required to fulfil certain regulatory requirements. As at 31 Mar 2020, the NRV is estimated to be SGD59m, a SGD45m (pre-tax) reduction in book value.
Urban business also affected by COVID-19.
- The pace of land and property sales for the urban business has been affected by the COVID-19 pandemic. Due to the measures undertaken by various governments, the business has had delays in regulatory and other approvals required. The uncertain economic outlook is expected to lead to lower take-up and demand, or delayed launches for some of the business' integrated developments and properties.
We cut FY20F net profit by 14%
- We cut Sembcorp Industries' FY20F net profit by 14% to SGD347m, due mainly to weaker energy business earnings, plus adjustments following our recent increase in FY20F losses for Sembcorp Marine (SGX:S51) (BUY, Target Price: SGD1.28, see report: Sembcorp Marine - RHB Invest 2020-05-13: Weak 1Q20 Business Volume, But Priced In).
- Our Target Price, which is SOP-derived, is cut by 14% to factor in these developments. See attached Fig1 in attached PDF report for SOP valuation details. Our Target Price works out to 10.3x FY20F EPS, which is 1.5SD below the 5-year average of 14.4x.
- See Sembcorp Share Price; Sembcorp Target Price; Sembcorp Analyst Reports; Sembcorp Dividend History; Sembcorp Announcements; Sembcorp Latest News.
- Sembcorp Industries expects to maintain positive operating cash flow in 2020 underpinned by its long-term contracts and diversified portfolio of businesses, despite the challenging conditions.
Leng Seng Choon CFA
RHB Securities Research
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https://www.rhbinvest.com.sg/
2020-05-20
SGX Stock
Analyst Report
2.00
DOWN
2.330
