Sembcorp Industries - UOB Kay Hian 2021-02-24: 2020 Results In Line With Good Potential For A Strong 2021

SEMBCORP INDUSTRIES LTD (SGX:U96)

Sembcorp Industries - 2020 Results In Line With Good Potential For A Strong 2021

Sembcorp Industries’s 2020 net profit fell 34% y-o-y to S$301m but combined with the non-cash, one-off financial effects of demerging from Sembcorp Marine as well as various exceptional items, the company reported a loss of S$997m.
We upgrade our Sembcorp Industries's 2021 and 2022 earnings forecast by 14% and 4% respectively and raise our target P/B multiple to 1.0x (previously 0.9x) which we believe is warranted due to Sembcorp Industries’s strong 2021 recovery prospects.
Maintain BUY. Target price: S$2.00 (previously S$2.02).

Sembcorp Industries (SGX:U96) reported a 34% y-o-y decline in net profit to S$301m which excludes exceptional items and the discontinued marine business. The results were in line with our expectations.
Including exceptional items and the discontinued marine business, Sembcorp Industries lost S$997m in 2020 (2019: S$247m) due to:
1. the non-cash, non-recurring fair value loss of S$970m as a result of the distribution in specie of Sembcorp Marine (SGX:S51) in 3Q20;
2. Sembcorp Industries’s share of Sembcorp Marine’s net loss of S$184m for 9M20, and
3. Sembcorp Industries’s exceptional items totaling -S$144m.

Sembcorp Industries declared a S$0.04/share dividend which was higher than our expectation of S$0.025/share.
Going forward, we forecast a 30% payout ratio thus implying a 3.0% yield for 2021.

While the India net profit declined 50% y-o-y given the lack of wind for its renewables business, even in high-wind season, the outlook may be positive as energy demand in Sembcorp Industries’s India portfolio in 4Q20 rose 6.4% y-o-y thus implying that electricity spreads should be good. UK demand proved to be weak overall in 2020 due to multiple COVID-19-related shutdowns of the economy. While recovery has been reasonably good in Jan 21, the company appears wary about over emphasising energy demand post-recovery .

In the past two years, Sembcorp Industries has built up its renewables portfolio, some of which will come to fruition in the near term. Some of these include:
1. Singapore’s floating solar project to be completed in 2H21;
2. 17MWp of rooftop solar installations completed in Vietnam in 2020;
3. land sales starting in 2022 from a new 1,000ha industrial park in Binh Dinh Province, Vietnam.

Over the past 12 months, Sembcorp Industries has strengthened its balance sheet by reducing its debt by 29%, from S$10.8b to S$7.7b. The effect of the demerger on Sembcorp Industries’s debt profile has been transformational. We highlight that the S$7.7b in debt appears high, but around S$3.7b of this is project financing which will be paid off at the project level and is thus relatively low risk in nature.
Note also that the company redeemed and cancelled S$600m and S$200m of perpetual securities in May and Jun 20 respectively. As at end-20, Sembcorp Industries’s net debt/equity stood at 2x, but we forecast that this will decline to 1.4x by end-22.

Since 2018, Sembcorp Industries has undertaken a comprehensive divestment programme that has netted the company proceeds of S$735m from 17 transactions. In the past year, divestments of note were the municipal water businesses in Chile and Panama, a dedicated water-treatment facility in China and a 32%-owned JV with Shenzhen Chiwan Sembawang Engineering Co.
In the medium to long term, Sembcorp Industries will look at refocusing its attention on its key markets of Singapore, China and India.

Sembcorp Industries owns and operates a 225MW power station in Myanmar which has not seen any disruption from the anti-military protests thus far. On the results call, management emphasised that its staff are safe and the plant is still operational, but would not be drawn on whether it would re-evaluate its investments in Myanmar

We have upgraded our 2021 and 2022 net profit forecasts for Sembcorp Industries by 14% and 4% respectively. The upgrade relates to the energy business where we have raised our net profit margin expectations from 5.0% to 5.5% for 2021, and from 5.7% to 6.0% for 2022 in light of the better-than-expected performance from this segment last year as well as our expectation for overall y-o-y demand recovery for both energy and utilities.
The earnings upgrade was however tempered by the loss of income from divested assets in Panama and Chile.

Reiterate our BUY rating for Sembcorp Industries with a marginally lower P/B-based target price of S$2.00 (previously S$2.02).
We have raised our target P/B multiple to 1.0x from 0.9x previously and peg this to Sembcorp Industries’s 2021 book value per share of S$2.00/share. Our new target P/B multiple is a slight premium to the company’s 5-year P/B average of 0.90x which we believe is warranted given Sembcorp Industries’s strong recovery prospects in 2021.
On a P/E basis, Sembcorp Industries’s 2021F P/E of 10.3x is a 22% discount to its past five-year average of 13.2x.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-02-24

SGX Stock Analyst Report BUY MAINTAIN BUY 2.00 DOWN 2.020