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

SEMBCORP INDUSTRIES LTD (SGX:U96)

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).

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.

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.

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.

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 from S$1.66 to S$2.02 as we roll forward our valuation year to 2021 and upgrade our target P/B multiple to 0.9x (previously 0.8x). Our new target P/B multiple is in line with its 5-year P/B average of 0.91x..
We believe our target multiple is reasonable as it reflects a better comparability between Sembcorp Industries and its regional utilities peers without the offshore marine overhang.
In addition, Sembcorp Industries’s earnings capability is now more transparent without the ‘fog’ of Sembcorp Marine (SGX:S51)’s losses (see report: Sembcorp Marine 3Q20 Business Update - UOB Kay Hian 2020-11-12: Outlook Still Bearish; Upgrade To HOLD On Valuation), and on a macro basis, the news of successful vaccine trials from Pfizer/BioNTech and Moderna has led to higher certainty that the global economic recovery post COVID-19 may be swifter than expected.

See Sembcorp Share Price; Sembcorp Target Price; Sembcorp Analyst Reports; Sembcorp Dividend History; Sembcorp Announcements; Sembcorp Latest News.
We highlight that Sembcorp Industries’s peers in the region trade at higher P/B multiples – specifically, gas & thermal utilities peers in the region trade at 2021F P/B of 0.5-3.2x (regulated utilities tend to trade at the higher end of this range) while renewables peers trade at 0.8-5.9x P/B, and water & waste treatment peers trade at 1.8-2.4x P/B.
Unfortunately, Sembcorp Industries does not disclose the book value of its various business segments in this manner and thus we are not able to undertake a comparable-company valuation. Nevertheless, with Sembcorp Industries trading at 2021F P/B of 0.7x, we remain confident that the valuation gap to its peers will close in the next 6-12 months.

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