SEMBCORP INDUSTRIES LTD (SGX:U96)
Sembcorp Industries - Transforming Brown To Green
- Sembcorp Industries is a positioned to raise its renewable/thermal energy mix from the current 40/60 of profit; details will be communicated at its investor day in May.
- FY20 energy core profit of S$301m beat our S$213m forecast, thanks to higher grant from Singapore and stronger Singapore power margin.
- Reiterate ADD with a slightly higher target price of S$1.97, still based on 1x CY21F P/BV. Sembcorp Industries trades at 0.8x P/BV, cheap vs regional power/utilities plays’ ~1.8x.
Sembcorp's core profit above expectation from lower corp costs, government grant
- Including Sembcorp Marine (SGX:S51) and distribution losses, Sembcorp Industries (SGX:U96) reported FY20 losses of S$997m vs our S$1.125bn expectation.
- Sembcorp Industries generated core net profit of S$151m in 2H20 and S$301m in FY20, beating our forecast of S$138m and S$213m respectively. The variance was largely from lower corporate costs due to S$22m/S$38m government grants in 2H20/FY20.
- Sembcorp Industries's 2H20 reported profit of S$198m included S$47m exceptional items gain (see Figure 2 in report attached below for details). Energy’s 2H20 core net profit of S$141m was in line, with strong performance in Singapore and Rest of World, but offset by the weaker performance in China and the UK. Urban development core profit of S$22m in 2H20 was below expectations due to lower land sale in Vietnam.
- See also report: Sembcorp Marine - CGS-CIMB Research 2021-02-24: Continue Losses But Proxy To Oil.
More impairment?
- We believe the rate of impairment should narrow ahead as Sembcorp Industries would have swept through its portfolio to do the necessary write-downs; any future impairment would likely be associated with the divestments of non-core businesses.
- Sembcorp Industries’s power plants in India are relatively new and management deems that no provision is required for now.
Operation updates.
- Sembcorp Industries generated 2H20 net profit of S$46m in Singapore, higher than our expectation. Sembcorp Industries guided for lower profits from Singapore in FY21F as a major customer, Eastman Chemical, will be discontinuing a product line in Jurong Island.
- 2H20 net profit from India was S$25m, below our expectations, mainly due to weaker wind and lower plant load factor (PLF) but offset by a S$15m insurance claim in thermal power project 1.
- China 2H20 net profit of S$38m was below our expectation, due to weaker wind resources for its 49%-owned JV Guohua Sembcorp.
- UK delivered a net loss of S$4m in 2H20, including S$8m losses at UK Power Reserve (UKPR). Management saw strong demand recovery in UK in Jan 21 but remained cautious on the full-year outlook.
- Refer to report attached below for more details.
Multiple avenues to raise renewable vs. thermal energy mix
- Sembcorp Industries's management is keen to shift the current renewable/thermal mix of 40/60 profit contribution in the medium term. The target mix, returns and funding details will be communicated at its Investor Day in May. We see this as a key catalyst as Sembcorp Industries’s position in the renewable energy and urban solutions market is unmatched in the region. Currently, it has 2,616 MW of renewable gross capacity and 6,734 MW of thermal gross power installed, and 602MW of solar and energy storage capacity under development.
- Other than M&As, we see multiple avenues for Sembcorp Industries to expand its renewable energy pipeline including continued efforts to bid for wind projects in India, set up JVs in China, boost battery storage capacity in the UK, and set up a rooftop solar farm in Vietnam industrial park.
Near-term profit decline; but still an ESG pick for the longer term
- Sembcorp Industries's gearing stood at 1.9x as at end-FY20. Management reaffirmed that it would use internal funding/green bonds for any expansion over the next 12-18 months and sees no need for equity fund raising.
- We forecast Sembcorp Industries's net profit to decline in FY21F, mainly due to lower profits from Singapore (exit of a major customer), the UK (key customer’s facilities undergoing a 1-year overhaul) and China (higher coal costs).
- See Sembcorp Share Price; Sembcorp Target Price; Sembcorp Analyst Reports; Sembcorp Dividend History; Sembcorp Announcements; Sembcorp Latest News.
- Sembcorp Industries is a classic stock for ESG investment in the longer term given the proper communication of its renewable energy plans.
- Risk: outages of plants and significant write-downs for its Indian thermal projects.
LIM Siew Khee
CGS-CIMB Research
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https://www.cgs-cimb.com
2021-02-24
SGX Stock
Analyst Report
1.97
UP
1.950
