Sembcorp Industries - UOB Kay Hian 2020-11-24: Well Positioned For Recovery In 2021


Sembcorp Industries - Well Positioned For Recovery In 2021

  • We believe Sembcorp Industries is well positioned for recovery in 2021. This comes as news of successful vaccine trials has led to higher certainty that the global economic recovery may be swifter than expected, thus positively impacting energy demand.
  • Sembcorp's share price currently trades at 0.7x 2021F P/B, which is undemanding in our view.
  • Maintain BUY on Sembcorp Industries with higher target price of S$2.02 (previously S$1.66).

Gradual divestments – positive for Sembcorp Industries's overall business.

  • In the past three years, Sembcorp Industries (SGX:U96) has divested a number of businesses with five of those divestments occurring in the past 12 months alone. The two major divestments were from the Americas (Panama and Chile) where Sembcorp Industries has pulled back its interests, where we have already factored in the latter’s S$91m forex-related loss. Click 'view full report' button below to see summary of Sembcorp Industries's acquisitions and divestments over the past 12 months in the PDF report attached.
  • In our view, these divestments should allow for better allocation of capital and resources in the future.

Debt load not a concern.

  • As at end-1H20, Sembcorp Industries had nearly S$10b in debt and leases, thus resulting in a net debt/equity of 1.75x. We do not see this as a concern given that the majority of this debt is project finance that has been consolidated into Sembcorp Industries.
  • Note also that in late-Oct 20, Sembcorp Industries redeemed its S$1.5b 3.55% guaranteed bonds due 2024 as part of the ongoing optimisation of its debt portfolio, funding this via a mix of drawdowns under its credit facilities and cash. While there was a one-time break fee payable to each bondholder, Sembcorp Industries will achieve annual interest cost savings of between S$25m-35m.

Recent 1HFY21 results from its India business were robust but one-off.

  • Sembcorp Industries’s India business unit, Sembcorp Energy India (SEIL), recently reported very strong results for the six months ending 30 Sep 20 (1HFY21) with net profit expanding by 24x y-o-y to Rs3.5b. However, this was due to a change in revenue-recognition laws and thus is a one-off event.

COVID-19 likely to continue to affect energy demand in parts of Sembcorp Industries’s geographies.

  • The UK’s COVID-19 situation has escalated over the recent weeks, registering over 21,000 cases daily. Sembcorp Industries’s UK business contributed around S$25m or 6% of its 1H20 energy profit before exceptional items of S$410m, which could see downside risk in 4Q20 and 1Q21 if cases continue to rise over the course of the Northern Hemisphere winter.
  • In addition, we highlight that India’s COVID-19 daily cases peaked in mid-September and while its daily cases have been falling since, this could presage weak 2H20 results coming from that business unit. In 1H20, India contributed c.45% of Sembcorp Industries’s operating profit from energy.

We upgrade our target price for Sembcorp Industries

Regional utilities peers trade at higher P/B multiples

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-11-24
SGX Stock Analyst Report BUY MAINTAIN BUY 2.02 UP 1.660