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Analysts stay conservative as Sembcorp Industries moves into the red

Amala Balakrishner
Amala Balakrishner • 3 min read
Analysts stay conservative as Sembcorp Industries moves into the red
Analysts remain neutral on Sembcorp Industries, after it moves into the red
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SINGAPORE (Feb 24): Analysts remain conservative in their calls for Sembcorp Industries, following the release of its FY2019 results on Feb 21.

The group plunged into the red, after posting losses of $15 million in 4QFY2019, from earnings of $106 million for the corresponding quarter in the previous year.

Overall, the group’s FY2019 earnings came in at $247 million, some 29% lower than the $347 million it recorded in FY2018.

This comes on the back of a $126 million profit to the group’s core segment, of which $87 million came from urban development following the completion and handover of the Riverside Grandeur residential units in China.

See: Sembcorp Industries sinks into the red with 4Q loss of $15 mil; proposes final dividend of 3 cents

Aside from urban development, the group’s core competencies are in power and water management.

Both segments recorded losses, with the energy segment reporting a net exceptional loss of $165 million on impairments to its businesses in the United Kingdom, Chile and China.

Meanwhile, its Sembcorp marine business posted a core ‘gross margin’ of -11.6% in 4QFY2019, which DBS Analyst Ho Pei Hwa says is “probably the worst we have seen in 20 years”.

Losses from the segment stood at $77.7 million in 4QFY2019, of which 60.5% or $47 million is incurred by Sembcorp Industries.

The board has since recommended a full-year final cash dividend of three cents per share, up from the previous year’s recommendation of two cents per share.

Along with the interim dividend of two cents paid out in September 2019, this brings the group’s total dividend for the year to five cents per share.

CGS-CIMB analyst Lim Siew Khee believes “momentum [from FY2019] is unlikely to sustain in FY2020F”. As such, she is looking at a net profit of $86 million this year.

DBS’ Ho agrees, predicating a 3 – 4% drop in earnings for FY2020/21, on the back of higher losses to Sembcorp Marine. This is due to “the absence of a $48 million accelerated depreciation charge and other overhead costs [that came] from the return of [its] Tanjong Kling yard at the end of 2019,” she adds.

Even so, relief is expected to come from the group’s India business. “India turned in a surprisingly high 4QFY2019 profit of $146 million (+142% growth quarter-on-quarter) against the seasonal trend,” Lim points out.

With independent research house CRISIL expecting India’s power market to continue recovering through a possible reversal of its current peak surplus by FY2020, the segment does provide significant opportunity for Sembcorp Industries.

Even so, both Ho and Lim have posted ‘hold’ calls on Sembcorp Industries, at target prices of $2.20 and $2.13 respectively.

Explaining her stance, Ho says “we derive our fair value for Sembcorp Industries based on the sum of different parts, with a 10% conglomerate discount to the revised net asset value. This represents 0.5 times price-to-book value”.

Sembcorp Industries’ shares were down 3.0% to close at $1.95.

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