Sembcorp Industries - OCBC Investment 2021-08-06: Pivoting Now For The Future

SEMBCORP INDUSTRIES LTD (SGX:U96)

Sembcorp Industries - Pivoting Now For The Future

Sembcorp Industries (SGX:U96) reported a 26% y-o-y rise in revenue to S$3.3b and net profit attributable to shareholders of S$46m in 1H21, compared to net loss of S$201m in 1H20. Excluding exceptional items of S$206m (comprising an impairment of S$212m of Chonging Songzao power plant and S$6m gain from the divestment of Sembcorp Jingmen Water Co), net profit grew 69% to S$252m, driven by higher contributions from the Conventional Energy segment.

Under the Conventional Energy segment which contributed the bulk of earnings, there was stronger performance from Singapore, India and the UK flexible generation assets as a result of higher demand and margins. Under the Renewables segment in Sustainable Solutions, performance in 1H21 was impacted by low wind resource in India. As for Integrated Urban Solutions, there was lower net profit due to the timing of land sales.
Overall, Sembcorp Industries's cashflow from operating activities rose from S$206m in 1H20 to S$480m in 1H21.

Looking ahead, uncertainties continue to persist with regard to the COVID-19 pandemic with the potential resurgence of infections globally. The underlying performance of the group will also be negatively impacted by changes in customer profile in the UK and Singapore, as well as loss of income from divested assets in Panama and Chile.
There are potential downside risks in the Conventional Energy segment across markets due to higher market volatility as well as higher fuel costs. In addition, there will be planned maintenance shutdowns in Singapore, Myanmar and India in 2H21.
Sembcorp Industries, however, is transforming its portfolio to focus on sustainable solutions. In 1H21, 78MW of renewable energy capacity was installed. About 87MW of capacity is expected to come onstream by end of this year.

Currently, about 25% of Sembcorp Industries’s total energy is in renewables (comprising installed and under development capacity), with the remaining 75% in thermal. In 2020, about 20% of the group’s bottom-line was attributed to renewables. Should Sembcorp Industries be able to execute its renewables strategy, the stock may re-rate in the future.
We maintain our fair value estimate of S$2.50 on Sembcorp Industries.
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Sembcorp Industries’s ESG performance has remained constant since Aug 2018; scoring above the industry average in the Governance and Carbon Emissions aspects, and lower than the industry average for Labour Management and Opportunities in Clean Tech.
Sembcorp Industries still mainly relies on thermal sources such as coal and gas, while exposes it to compliance risks associated with the increasingly stringent carbon tax schemes in Singapore. We see potential for improvement given the group’s strategy to increase its exposure to renewables in the future.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2021-08-06

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