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


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.
  • Target price: S$2.20.

Sembcorp Industries' 1H20 Results weaker than expected.

  • 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.

A number of exceptional 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.

A mixed business update for 1H20.

  • 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.

Dividends for 1H20 deferred.

  • 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.

Downgrade Sembcorp Industries' earnings for 2020-21.

  • 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.

Upgrade to BUY but maintain target price of S$2.20.

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