Sembcorp Industries - DBS Research 2021-02-24: Nearing A Perfect Turnaround


Sembcorp Industries - Nearing A Perfect Turnaround

  • Sembcorp Industries's FY20 recurring income down 34% y-o-y; declared final dividend of 4 cents or 2.4% yield.
  • Pure utilities play post demerger with Sembcorp Marine (SGX:S51).
  • Well-positioned to leverage on global focus on renewable energy.
  • Catalysts: More clarity on renewable energy growth direction and recapitalisation.

Sembcorp's FY20 earnings bottoming out

  • Sembcorp Industries (SGX:U96)'s FY20 reported huge losses due largely to fair value loss following Sembcorp Marine (SGX:S51) distribution. As guided in its profit warning in Dec-2020, Sembcorp Industries reported a net loss of S$997m (vs net profit of S$247m in FY19). Earnings were hit by one-time fair value loss from the distribution in specie (S$970m) of Sembcorp Marine shares, impairment (exceptional items totaled S$144m), and COVID-19’s impact on the company’s top-line.
  • The one-off ~S$970m paper loss is the result of the fair value of distribution in specie as at 11 September of S$1,597m being lower than the carrying amount of Sembcorp Marine at S$2,715m as at 30 June.
  • Recurring income down 34% y-o-y. Excluding the exceptional items and discontinued Marine business, Sembcorp Industries would have made a net profit of S$301m (-34% y-o-y).
  • Despite a challenging global market environment amid the pandemic, underlying performance of the Energy business was relatively resilient, with net profit falling by a moderate 17.5% y-o-y to S$297m. Urban business tends to be lumpy by nature, and profit nearly halved to S$60m.

Operating cash flow positive.

  • On a positive note, Sembcorp Industries is operating cash flow positive at S$220m, underpinned by the relative stability in its energy and urban businesses.

Growing Renewable Portfolio

Renewable represents ~25% of Sembcorp Industries’ power capacity.

  • Sembcorp Industries has been growing its renewable portfolio in recent years, to a decent size of over 3.2GW or ~25% of its total power capacity. Of which, over 75% is wind while 21% is solar; energy storage (UKPR) forms the remaining 4%.

India is the key market

  • India is the key market for renewables, accounting for ~65% of Sembcorp Industries’s renewable capacity, followed by China, ~23% and Singapore ~7%.
  • Vietnam is an up-and-coming new market added to its portfolio in 2020, which will likely be another growth engine for Sembcorp Industries over the medium term.

India is among the fastest growing market for renewable energy.

  • The Indian renewable energy sector is one of the world’s largest and fastest growing markets. The sector has witnessed rapid growth in the past decade, contributing 8-9% of India’s electricity, steadily moving towards contributing 15-20% in the next 10 years.

Likely to maintain earlier target to grow India’s renewable capacity by 300-500MW pa (or ~10-15% of total renewable capacity).

  • While new CEO, Mr Wong Kim Yin, who came on board in July-2020 hasn’t officially disclosed a growth target, India remains a key growth market given the huge potential.

Expanding renewable footprint in China.

  • Sembcorp Industries recently signed an MOU with GDS Holdings Limited (GDS), a developer and operator of high-performance data centres in China, as a strategic partner to explore integrated green solutions to support GDS’s environmental sustainability goals, realising operational synergies between GDS’s green data centres and Sembcorp’s renewable power generation and water management systems.

Singapore: rooftop solar power.

  • Sembcorp Industries has been a major solar player in Singapore. Its move to expand into solar started in 2018, in line with its strategy to double its renewable portfolio to 4,000MW by 2022. It has won several projects from Housing & Development Board (HDB) and the Singapore Economic Development Board (EDB) to build, own and operate and maintain grid-tied rooftop solar systems on HDB blocks and other government sites. It has also inked a deal to supply solar power to global companies like Google, Facebook and UBS for their Singapore premises.

Timely establishment of Environmental Sustainability Platform – a marketplace for trading of RECs and Carbon credit.

  • On 27 Oct, Sembcorp Industries announced another key milestone on collaboration with SP Group to develop an Environmental Sustainability Platform, a one-stop global solution to help corporates and consumers achieve their sustainability goals. Launched in 1Q21, the platform aims to include a marketplace that trades renewable energy certificates (RECs) and carbon credits as well as provide carbon consulting services.
  • RECs and carbon credits are recognised as a way for buyers to achieve their green targets, enabling them to report their consumed green energy or carbon emission reduction. This is a timely move as more customers pivot towards low-carbon energy goals. More companies have joined RE100, a global initiative that brings together the world’s leading businesses committed to using only renewable electricity.

Capital Recycling

Net gearing shot up to ~2x post Marine demerger through dividend-in-specie.

  • Sembcorp Industries subscribed to Sembcorp Marine’s rights issues with the S$1.5bn subordinated loan granted to them and distributed all Sembcorp Marine shares including the rights shares to shareholders. Gearing shot up post exercise as the move resulted in lower equity value post dividend-in-specie but higher gearing post deconsolidation of Sembcorp Marine’s balance sheet (S$1.5bn subordinated loan to Sembcorp Marine which was raised through bond issuance continues to sit on Sembcorp Industries’s balance sheet)

Capital Recycling.

  • During Sembcorp Industries’s last strategic review in 2017/18, one of the main targets was to focus on proactive capital recycling to augment its balance sheet and enhance ROE, including divestment of utilities assets and IPO of India energy assets, SEIL.


  • On 23 Feb 2018, Sembcorp Industries initiated the process for an IPO of SEIL on BSE Limited and the National Stock Exchange of India. This was however shelved due to market sentiment. Assuming Sembcorp Industries retains ~50% of stake in SEIL, the IPO could free up over S$600m cash for Sembcorp Industries.


Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2021-02-24
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