Sembcorp Industries - CGS-CIMB Research 2020-09-18: Need To Sharpen Focus

SEMBCORP INDUSTRIES LTD (SGX:U96)

Sembcorp Industries - Need To Sharpen Focus

We factor in lower equity base and fair value loss of c.S$1.1bn in Sembcorp Industries post Sembcorp Marine’s deconsolidation. Our NAV stands at S$1.77 and S$1.95 for FY20-21F.
We think clearer communication to be a ‘more focused’ group could restore investor confidence while restructuring is a medium-term catalyst.
Our Target Price for Sembcorp Industries is also adjusted to S$1.95, now based on 1x CY21F group P/BV, in line with the expected improved ROE of c.11.8%.

We deconsolidate Sembcorp Marine (SGX:S51) from Sembcorp Industries (SGX:U96)’s books to reflect the completion of distribution in specie and demerger. This includes the recognition of S$1.18bn fair value loss in 2H20F due to lower price of Sembcorp Marine shares (S$0.182) vs. the theoretical ex-rights price of S$0.308.
Our ‘new-entity’ NAV per share stands at S$1.77 for FY20F and S$1.95 for FY21F. Net gearing rises to 1.97x for FY20F due to a lower equity base.

In our view, there is no direct competitor for Sembcorp Industries as it has diversified income streams (gas, power, water, renewable energy) with almost equal earnings contribution from Singapore, China, Middle East and India, whereas peers typically command a monopoly position or are single product (gas or power) companies with long-term concessions.
Sembcorp Industries trades at 6x CY21F P/E and CY21F P/BV of 0.67x . Over time, Sembcorp Industries should trade closer to the power/gas plays in the region of 13x P/E and 1.54x P/BV. Without Sembcorp Marine, group ROE should improve to c.11.8% (vs. 5% in the past 6 years).

We estimate utilities profit of S$313m and S$335m in FY21F-22F. Assuming no further asset impairment, utilities equity base of c.S$3.5bn-3.8bn, should generate sustainable ROE of c.8%. We believe that as the dust settles in FY21F, efforts could be stepped up in capital recycling to unlock value and improve ROE.
In addition, cost optimisation could also drive longer-term margin, in particular for Singapore as 10-year LNG contract of 42BBTUd with British Gas expires in 2023. By then, we expect a more balanced gas supply/demand situation as other gencos are likely to roll off the LNG contracts committed in 2008.

In the 1H20 results briefing, the new CEO said that post demerger of Sembcorp Marine, Sembcorp Industries continues to focus on urbanisation, electricity and carbonisation, indicating no major shift in strategy.
Efforts to divest small non-core assets remain, which include the recent divestment of JV Shenzhen Chiwan Sembawang Engineering (at S$29m). We think reiteration of the group’s strategy and improved disclosure could restore investor’s confidence.

In our view, there is no direct competitor for Sembcorp Industries as it has diversified income streams (gas, power, water, renewable energy). In terms of geographical reach, it has almost equal earnings contribution from Singapore, China, Middle East and India, whereas peers typically have a monopoly within the country or are a single product (gas or power) company with long-term concessions. Therefore, we believe clear strategy communication is key to re-educate investors.

FY20F is a wash-out year due to impairment and fair value losses. Medium-term catalysts tment of non-performing assets or unlocking value in urban development.
See Sembcorp Share Price; Sembcorp Target Price; Sembcorp Analyst Reports; Sembcorp Dividend History; Sembcorp Announcements; Sembcorp Latest News.
We revise our core EPS by -2 to 9% for FY20F-22F mainly to reflect the deconsolidation of Sembcorp Marine. Our Target Price for Sembcorp Industries is reduced from S$2.27 to S$1.95, now based on 1x CY21F group P/BV, in line with the expected improved ROE of c.11.8%.
Key risks to our call include prolonged unplanned outage of plants and unfavourable regulatory changes. See PDF report attached below for complete analysis on Sembcorp Industries.

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-09-18

SGX Stock Analyst Report ADD MAINTAIN ADD 1.95 DOWN 2.270