Sembcorp Industries - DBS Research 2021-08-10: Strong 1H Core Earnings; Renewables At The Core


Sembcorp Industries - Strong 1H Core Earnings; Renewables At The Core

  • Sembcorp Industries's 1H21 core earnings above expectations; driven by higher demand and margins in Singapore and India.
  • 2H likely to be sequentially softer due to margin normalisation and loss of income due to plant maintenance.
  • Declared 2-cents per share interim dividend.
  • Reiterate BUY; target price S$2.40.

Core earnings above expectations.

  • Sembcorp Industries (SGX:U96) reported headline profit of S$46m. Excluding S$212m impairment for Chonqing power plant and S$6m divestment gain, core net profit would have been S$252m, ahead of expectations with 1H earnings making up over 80% of full-year forecasts.

Driven by strong performance in Singapore and India.

  • The outperformance stemmed from the strong showing of its conventional energy business, in particular higher demand and margins in Singapore and India. In Singapore, spark spread expanded alongside higher HSFO prices. Similarly in India, demand and tariff were also very firm.

Impairment for Chongqing coal-fired power plant.

  • Sembcorp Industries has two coal-fired power assets in China and India. An impairment of S$212m was booked in 1H21 for China Chongqing Songzao coal-fired power plant (1.3MW capacity; 49%-owned JV). This was due to the loss of mine-mouth advantage as Sembcorp Industries’s JV partner shut its coal mine following the Chinese government’s directive to close coal mines in Chonqing. The plant had to transport coal from other provinces at a higher cost and consequently incurred losses in 1H21 (from a net profit of S$19m in FY20).

Impairment risk of India coal-fired plant cannot be ruled out.

  • Management assessed the carrying value of the other coal-fired power assets in India (2.64MW capacity) and concluded that the fundamentals remain intact. However, we cannot rule out the possibility of a potential impairment if the outlook changes.

2H likely to be sequentially softer.

  • Management expects 2H core earnings to be sequentially softer from the high base in 1H. Spark spreads are likely to normalise in Singapore and India (as higher coal prices filter through).
  • In addition, there are also scheduled maintenance shutdowns in Singapore, India and Myanmar in 2H, pushed back from 1H. We have fine-tuned our 2021 numbers to reflect the 1H performance.

Renewable at the core.

Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2021-08-10
SGX Stock Analyst Report BUY MAINTAIN BUY 2.400 SAME 2.400