Sembcorp Industries - CGS-CIMB Research 2020-07-18: Towards A New Chapter


Sembcorp Industries - Towards A New Chapter

  • Sembcorp Industries (SGX:U96) reported losses of S$131m for 1H20, including S$191m impairment loss and write-downs mainly in energy. Core net profit (S$60m) missed due to marine.
  • Energy segment’s 1H20 net loss of S$5m included one-offs worth S$161m. Energy core profit of S$156m was driven by China, RoW and India.
  • We believe re-rating of energy business takes time as new CEO is on board. No major strategic review is required for now.
  • Maintain ADD with Target Price at S$2.27.

Write-down of Hin Leong gasoil inventory; Oman credit downgrade

  • Impairment losses and write-downs of S$191m included S$161m in the energy segment and S$30m in other businesses. Majority of the energy impairment was due to write-down of gasoil reserves to net realisable value (NRV) and the uncertainty over recovery of gasoil inventory at Hin Leong Trading.
  • It also reported impairment on its investments in Sembcorp Salalah Power and Water Company (Salalah) due to credit rating downgrade for Oman and fair value gain previously recognised during Salalah’s IPO in 2013. We believe the quantum of impairment should taper in 2H20F, with c.S$30m currency translation loss likely after the divestment of water business in Chile in 3Q20F.

China recovers faster than the rest; Middle East tariff higher

  • The reduction in economic activity due to lockdowns led to reduced demand for energy and lower prices. Energy’s core net profit fell 12% y-o-y to S$156m due to lower energy demand in Singapore (-5% y-o-y), India (-16%), and UK (-20%). However, China profit rose 7% y-o-y to S$62m in 1H20 as hydro-power supply was weaker which drove the demand for thermal power.
  • As China’s economy opened ahead of the rest of the world, we think the demand could sustain into 2H20F, resulting in stable profits y-o-y in FY20F. A key risk is a second wave of Covid-19. Middle East surprised positively as 1H20 core profit rose 26% y-o-y and 63% hoh to S$49m on higher tariffs in Salalah and Fujairah, and an insurance settlement.

India and Singapore operations challenging

  • India profit of S$25m in 1H20 (-29% y-o-y, -62% hoh) beat our forecast due to a customer payment settlement of S$23m. Plant load factor for SEIL 1, 2 and SGPL was 86%, 67% and 24% (1H19: 72%, 84%, 22%), respectively. We forecast Sembcorp Industries’s India profit to fall 23% y-o-y to S$77m in FY20F, mainly driven by wind power and SEIL 1. SEIL 2 is likely to remain in losses as operating conditions are worse y-o-y.
  • Singapore profit of S$30m in 1H20 was a record low due to the circuit breaker, lower gas sales and loss of profit from the divested JAC assets. Jurong Island activities have been reduced and as Singapore heads into a recession, we believe utility load demand is likely to remain weak in 2H20F. Utility assets are nearing end-of-life (c. > 20 years), and a review of replacement capex is on the cards.

New CEO on board since 1 Jul,

  • New CEO, Mr. Wong Kim Win’s immediate focus is the recapitalisation of Sembcorp Marine (SGX:S51) and demerger. He believes that Sembcorp Industries is in the right geography– India, China, Southeast Asia and the group is well positioned in the sectors it operates in.
  • Formerly the CEO of SP Group, Mr Wong has more than 20 years of experience in the energy sector and in investment management. He was the senior managing director of investments at Temasek International, responsible for investments in various sectors, including the energy, transportation and industrial clusters.
  • Prior to Temasek, Mr. Wong Kim Win worked for The AES Corporation, a power company listed on the New York Stock Exchange. He is also the chairman of SkillsFuture Singapore, a government agency under the Ministry of Education.

Guidance for FY20F

  • With the continuing losses at Sembcorp Marine and energy impairment losses in 1H20, Sembcorp Industries expects to incur a loss for FY20F.
    • Plans to maintain positive operating cashflow.
    • Core profit for the energy business to be significantly lower than in FY19.
    • Urban business profit to be lower than in FY19.

Sembcorp Industries' SOP target price of S$2.27

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-07-18
SGX Stock Analyst Report ADD MAINTAIN ADD 2.270 DOWN 2.490