SEMBCORP INDUSTRIES LTD (SGX:U96)
Sembcorp Industries - 1H21 Strong Results, But Decidedly Bearish Guidance For 2H21
- Sembcorp Industries reported a strong 1H21 with NPAT before exceptional items increasing by 69% y-o-y to S$252m and ahead of our estimates. However, management has guided for a weaker 2H21 due to maintenance shutdowns, higher fuel costs and market volatility, not to mention continued impacts from COVID-19.
- With valuations remaining inexpensive, we maintain BUY rating on Sembcorp Industries with target price of S$2.59.
Sembcorp Industries reported better-than-expected results ...
- Sembcorp Industries (SGX:U96) reported a strong 1H21 with revenue increasing 26% y-o-y to S$3.3b which generated pre-exceptional NPAT of S$252m, a jump of 69% y-o-y. Even including the exceptional item related to its China power asset (announced in a profit warning on 2 Aug 21), NPAT rose 8% y-o-y.
- Sembcorp Industries’s results were better than expected with 1H21 revenue and EBITDA forming 57% and 61% of our full-year estimates respectively. A dividend of $0.02 per share (payout ratio of over 77%) was declared vs zero in 1H20.
- ...but guidance on outlook was decidedly bearish. In its outlook statements, the company painted a bearish picture, highlighting:
- maintenance shutdowns in Singapore, Myanmar and India in 2H21;
- market volatility and higher fuel-cost impact in its conventional energy business (eg higher coal costs in India); and
- continuing challenges related to COVID-19.
- All divisions contributed to the strong result with higher y-o-y contribution from the solar & energy storage and waste treatment businesses, as well as higher energy demand seen in Singapore and India. This was slightly offset by lower land sales contribution from the urban solutions business.
STOCK IMPACT
- Sembcorp Industries generated very strong free cash flow (FCF) in 1H21 of $423m which was a 178% y-o-y increase. The strong FCF occurred despite capex being 61% higher y-o-y at S$176m. In addition, ROE rose to 8.5% in 1H21 vs 1.9% in 1H20.
- Debt levels remain manageable with net debt-to-equity at end-1H21 at 1.9x, although 43% of the company’s net debt is project-finance related. As at end-1H21, Sembcorp Industries had net debt of S$6.6b which was flat vs end-20. During 1H21, the company raised S$400m in green bonds which was mostly spent on clearing its floating-rate revolving-credit facility related to its solar capex in Singapore.
- China impairment of S$212m masked an otherwise strong 1H21. On the analyst call, Sembcorp Industries’s management noted that impairment was necessary as the long-term prospects for the project thermal power project in Chongqing are very poor given that its mine-mouth coal mine has been shut down. As a result, costs have increased due to the necessity of coal imports, coupled with the fact that the province can import renewable power from its neighbours. Given the lack of government support, Sembcorp Industries was forced to write off the whole project but would not be drawn on whether it would look to sell it in the near term.
- Renewable and conventional energy performance on a country-by-country basis was mixed with Singapore and the UK doing well due to higher y-o-y demand.
- Singapore in particular saw improvements from both the gas and energy businesses due to better demand resulting in a 39% y-o-y increase in revenue, aided by a S$13m gain from hedging in its conventional energy segment.
- In the UK, high demand periods led to better performance (1H21 revenue +48%) and profit margins; however, this was offset by a deferred tax charge of S$19m due to new legislated tax changes. India also did well (1H21 revenue +10% y-o-y), again due to higher demand as well as stronger dark spreads.
- Urban solutions segment saw a flat y-o-y performance due to lower contribution from commercial and residential sales in China. In addition, a resurgent COVID-19 wave in Vietnam in 2Q21 led to movement restrictions which meant that customers could not visit showrooms; thus the lower y-o-y land sales is not indicative of a structural decline.
- Crunch time in the medium term for some of Sembcorp Industries’s conventional assets. Given Singapore’s drive to import more energy as well as maximising the amount of renewables, Sembcorp Industries will need to look at the rationalisation of its 1,219MW Cogen plant. The company stated that it will defer this discussion until it obtains some clarity from the Singapore Government.
EARNINGS REVISION/RISK
- No changes to earnings estimates for Sembcorp Industries as our numbers were already below consensus for 2021, and had factored in a slight 2H earnings decline.
VALUATION/RECOMMENDATION
- Maintain BUY on Sembcorp Industries with a P/B-based target price of S$2.59 which is pegged to a target multiple of 1.2x.
- In the near term, Sembcorp's share price will likely tread water given the bearish outlook statements presented by the company’s management. However, we foresee an upward re-rating of Sembcorp Industries’s valuation multiples in the medium term due to the scarcity value of solid ESG companies in Singapore.
- See
- At our target price, Sembcorp Industries would trade at 13x 2022 earnings which we think is reasonable.
SHARE PRICE CATALYST
- Sustained economic recovery post COVID-19, thus leading to increased energy and utilities age.
Adrian LOH
UOB Kay Hian Research
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https://research.uobkayhian.com/
2021-08-10
SGX Stock
Analyst Report
2.590
SAME
2.590
