Sembcorp Industries - UOB Kay Hian 2020-07-20: 1H20 Despite Weak Results, Upgrade To BUY On Valuation Grounds

SEMBCORP INDUSTRIES LTD (SGX:U96)

Sembcorp Industries - 1H20 Despite Weak Results, Upgrade To BUY On Valuation Grounds

Sembcorp Industries’ 1H20 results were impacted by exceptional items and Sembcorp Marine’s losses. While the outlook remains uncertain in the next 3-6 months, we upgrade the stock to BUY on valuation grounds.
Looking forward to 2021, and especially post demerger with Sembcorp Marine, we anticipate the company will be in a better position to chart its destiny without the Sembcorp Marine overhang and its valuation multiples can re-rate higher towards regional utilities peers.

Sembcorp Industries (SGX:U96) reported weaker-than-expected net loss of S$131m for 1H20, impacted by S$161m in exceptional items as well as losses at Sembcorp Marine (SGX:S51). Excluding exceptionals and Sembcorp Marine’s losses, Sembcorp Industries’ underlying businesses reported a respectable 7% y-o-y decline in net profit to S$200m for 1H20.
Outlook remains weak for at least the next quarter, given that economies are still trying to re-open and thus energy and utilities demand will take time to recover. As a result, Sembcorp Industries has guided for a loss for 2020 which takes into account the expected poor performance from Sembcorp Marine, even if the demerger were to successfully occur by end-3Q20, as well as the impact of exeptional items.

Lower gasoil prices coupled with alleged fraudulent activities at Hin Leong caused a combined S$82m in exceptionals. Also, the negative outlook for Oman, where rating agencies have downgraded the country twice in the past six months, has increased the cost of capital going into the country.

Sembcorp Industries’ energy business reported a 15% y-o-y decline in net profit while the urban business showed a strong y-o-y increase due to land sales in China. Going forward, lower levels of economic activity will continue to impact the company with power prices a key issue.
Management commented that within the Singapore utilities business, its Jurong island unit has witnessed lower electricity and steam demand. Its UK Power Reserve continued to make losses of S$3m in 1H20, offset by the rest of the UK business’ S$14m profit.

Since 2014, Sembcorp Industries had paid an interim dividend of S$0.02- 0.05/share. However, for 1H20, the company has opted not to pay an interim dividend and will wait until the year-end to ascertain if a full-year dividend is feasible. As a result, we lower our 2020 DPS estimate to S$0.025/share. See Sembcorp Dividend History.
On the results call, management stated its belief that its operating cash flow remains strong and hopes to pay a final dividend for 2020. We note that Sembcorp Industries recorded free cash flow of S$152m in 1H20, a 66% y-o-y decline.

We lower our earnings forecast for 2020 and we now expect a loss due to weak market conditions, continued losses at Sembcorp Marine, as well as exceptional items recorded in 1H20. For 2021, we slash our net profit forecast by 48%, however this includes S$47m share of Sembcorp Marine losses which Sembcorp Industries would not have to bear if the planned demerger is successful.

Our upgrade is based on solely on valuation, given the large gap between Sembcorp Industries current share price and our SOTP-based target price which uses a bearish target P/B of 0.6x. The Sembcorp Marine valuation contribution uses the low end of the 4.27-4.91 Sembcorp Marine shares that will be distributed to Sembcorp Industries shareholders. See also report: Sembcorp Marine - UOB Kay Hian 2020-07-16: 1H20 Losses Mount As Shipyard Operations Have Yet To Restart.
We highlight the considerable risks for Sembcorp Industries in the next 3-6 months, given the uncertainty about the pace of regional and global economic recovery as the threat of a second wave of COVID-19 infections is high. Absent a decent economy, energy and utilities demand cannot recover. Longer term, Sembcorp Industries remains a play on urbanisation and electrification.
See Sembcorp Share Price; Sembcorp Target Price; Sembcorp Analyst Reports; Sembcorp Dividend History; Sembcorp Announcements; Sembcorp Latest News.
Sembcorp share price catalysts:
- Passing of the three inter-conditional resolutions at the EGM that is expected to be held in late-Aug 20.
- Sustained economic recovery post COVID-19 outbreak, thus leading to increased energy ilities demand.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-07-20

SGX Stock Analyst Report BUY UPGRADE HOLD 2.200 SAME 2.200